In this post, you’ll learn how a stop-loss strategy can help you manage the wild swings of the stock market, so you don’t make decisions you’ll regret. A stop-loss protects your investments by selling a stock if it drops below a set price, saving you from greater losses.
You’ll discover how it reduces stress, stabilises your portfolio, and gives you peace of mind, especially in volatile markets. If you’re looking for more stable growth and less worry, this post will help you.
Estimated Reading Time: 6 minutes
Investing can be an emotional experience. Watching your portfolio’s value fall wildly can lead to sleepless nights and hasty decisions you may regret later. But there’s a strategy that can help you manage volatility and bring stability to your investments and emotions: a stop-loss strategy.
Understanding Stop-Loss Strategies
A stop-loss is a set price level at which you decide to sell a stock to prevent further losses. For example, if you buy a stock at $100 and set a stop-loss at $90, your investment will be sold if the stock price drops to $90.
This prevents you from holding a falling stock in the hopes that it will recover, leading to even bigger loss. This is a common mistake a lot of investors make, especially beginners.
There are two main types of stop-loss strategies, with trailing stop-losses being particularly effective. It is also what we recommend you use. We use them in both our investment newsletters, and I do in my portfolio.
A trailing stop-loss moves up as the stock price increases, locking in your gains while protecting you from significant losses if the stock price falls.
For example, you set a 20% trailing stop-loss on a stock you bought at $100. As the price rises to $150, your stop-loss moves up to $120 (150 - 20%). If the stock drops to $120, your stop-loss triggers, selling the stock and locking in your gains.
If the stock continues to rise, the trailing stop-loss will keep moving up, protecting even more of your profit.
Click here to see how to calculate your trailing stop loss correctly!
Reducing Portfolio Volatility
One of the main benefits of using stop-loss strategies is reducing your portfolio’s volatility. Volatility is how much the price of a stock, or your portfolio moves over time. As you know high volatility, especially down, is stressful.
Stop-loss strategies help to reduce this volatility by automatically selling stocks that drop below a certain price. This means that you won’t be caught holding a stock that continues to fall, potentially saving you from large losses.
By limiting the downside, stop-loss strategies create stable and more predictable growth in your portfolio.
Promoting More Stable Growth
When you use stop-loss strategies, you are setting a floor on your losses, which allows you to focus on the long-term growth of your portfolio without worrying about market fluctuations.
Stability is important during market drops when fear and uncertainty can lead to panic selling. Investors who don’t have a stop-loss strategy in place might hesitate to take a small loss and sell their stocks at the worst possible time, locking in losses at the bottom of the market because they cannot take the emotional pain any more.
In contrast, a strict stop-loss strategy helps you avoid making rash decisions based on emotions as you took the decision to sell a long time ago before the emotional pain started.
Peace of Mind During Market Downturns
Stop-loss strategies give you peace of mind because they remove the need to make tough decisions in the heat of the moment when stocks are falling. When you know that your investments are protected by a stop-loss, you can invest a lot easier because you know you have a plan in place to get out and limit your losses.
This peace of mind is especially valuable during periods of market volatility. Instead of constantly checking the market and worrying about your investments, you can trust that your stop-loss strategy will take care of the downside risk. This lets you focus on your long-term investment goals.
Conclusion
Stop-loss strategies are a powerful tool for managing portfolio volatility and give you more stable returns over time. By setting price levels for selling your stocks, you can limit your losses and reduce wild swings that cause stress and lead you to making bad decisions.
This not only helps protect your capital but also provides peace of mind during market downturns, allowing you to stay focused on your long-term investment strategy.
If you haven’t already, seriously think of setting up a stop-loss strategy to enjoy more stable growth and a smoother investment journey.
Click here to see how to calculate your trailing stop loss correctly!
Frequently Asked Questions About How to Protect Your Portfolio From Wild Swings With Stop-Losses
Why should I use a stop-loss strategy?
Stop-loss strategies help you protect your investments during downturns. They let you sell a stock automatically if it hits a set price, limiting your losses and preventing you from holding onto a stock that keeps falling. This approach keeps your portfolio safer and helps you avoid the emotional stress of big losses.
How does a trailing stop-loss work?
A trailing stop-loss moves up with the stock’s price, locking in gains.
For example, if you buy a stock at $100 and set a 20% trailing stop, your stop-loss will rise as the stock price increases. If the stock hits $150, your stop-loss moves to $120, protecting your gains. If the price falls to $120, it triggers a sale, securing your profits.
What’s the difference between a regular stop-loss and a trailing stop-loss?
A regular stop-loss stays fixed at a specific price usually a fix percentage like 10% to 20% below your purchase price. A trailing stop-loss, however, moves up as your stock’s price rises, protecting your gains while minimizing losses if the price falls.
Can a stop-loss help reduce my stress about market drops?
Absolutely! Knowing you have a stop-loss in place can give you peace of mind during market volatility. You’re have set up a system to limit losses without having to make emotional decisions in the heat of the moment. This can save you from panic selling at the worst time.
Will stop-losses lower my returns over time?
Not necessarily. Studies show that stop-losses can improve returns by reducing large losses. You might miss small recoveries after a dip, but avoiding big losses can help your portfolio grow more steadily.
How do I decide what percentage to set my stop-loss?
Research has shown that a level of 15% to 20% works best for trailing stop-losses, balancing protection with the flexibility to let your stock grow. You may adjust this based on your risk tolerance—lower if you are a more cautious investor or higher if you’re willing to take on a bit more risk.
What if the stop-loss triggers too early and the stock goes back up?
This is always possible. But remember, your goal is protection, not perfection.
Sometimes, you might miss a rebound, but more often, in over 60% of the time in research we have seen, a stop-loss saves you from a deeper loss. Plus, having cash on hand after selling lets you reinvest in other opportunities.
Click here to see how to calculate your trailing stop loss correctly!
