This short webinar shows you why and how (step by step) to implement an effective stop loss system in your portfolio.
I was never a great supporter of stop-loss systems.
This was mainly been because I believed the value investing idea that if you liked a company at a stock price of €10 you should like it even more at a price of €7.
After a few spectacular losses
After a few spectacular losses using this approach and riding another few value traps right to the bottom I decided I had to find a way to save my portfolio from these disasters.
That is why I decided to take a very detailed look at research papers that tested stop-loss strategies. What I found really surprised me and it changed my mind about using stop losses completely!
And I am sure it will change your mind too.
What was included?
In the webinar you will learn:
- How stop losses have performed in over 150 years of testing in 3 research papers
- What type of stop loss performed best?
- Do they increase or decrease returns
- What about false signals
- What stop loss % is the best to use?
- Exactly how to implement a stop loss strategy
Be sure to watch right to the end as we answered a lot of questions - perhaps also one you may have.
Here is the presentation
To download the presentation click on the following link:
Truths_about_stop-losses_nobody_wants_to_believe
Video of the webinar
Here is the recording of the webinar:
Frequently Asked Questions About Stop Losses
Beginning Investors FAQs
1. What is a stop-loss strategy, and why should I consider using it?
A stop-loss strategy is a method used in investing to limit losses on an investment. By setting a predefined point at which your investment will be sold, you can prevent significant financial loss. Research shows that employing a simple stop-loss strategy can enhance returns while simultaneously reducing losses, making it an effective tool for managing risk in your portfolio.
2. What does the research say about the effectiveness of stop-loss strategies?
Multiple studies have shown that stop-loss strategies can be beneficial. For instance, one study demonstrated that over a 54-year period, a simple stop-loss strategy outperformed bonds 70% of the time when the market was rising and limited losses by investing in bonds during downturns. This suggests that stop-loss strategies can provide higher returns and lower losses over time.
Another study focusing on the OMX Stockholm 30 Index revealed that a trailing stop-loss strategy, especially with a 15% or 20% loss limit, significantly outperformed a buy-and-hold strategy over an 11-year period, including then the internet bubble burst and the financial crisis. This further underscores the effectiveness of stop-loss strategies in providing higher returns and reducing losses over time, across different markets and economic conditions.
3. What’s the difference between a trailing and traditional stop-loss strategy?
A trailing stop-loss strategy adjusts the stop-loss level as the price of an asset increases, locking in profits.
A traditional stop-loss strategy sets the stop-loss level based on the purchase price. Research suggests that trailing stop-loss strategies often yield better returns than traditional ones, especially at certain loss levels.
4. What stop-loss percentage should I use?
According to research, the most effective stop-loss levels for maximizing returns while limiting losses are between 15% and 20%. These levels strike a balance between allowing some market fluctuation and protecting against significant downturns.
5. Can stop-loss strategies prevent large portfolio losses during market crashes?
Yes, employing stop-loss strategies, especially with momentum investing, can significantly reduce the impact of market crashes. Studies have shown that a well-implemented stop-loss can even turn potentially massive losses into minor gains by avoiding the worst periods of market downturns.
Advanced Investors FAQs
1. How do stop-loss strategies affect the Sharpe ratio and overall portfolio volatility?
Implementing a stop-loss strategy can improve the Sharpe ratio—a measure of risk-adjusted return—by lowering portfolio volatility and enhancing returns. For example, a study found that a stop-loss strategy increased the average return from 1.01% to 1.73% per month and reduced the standard deviation of returns, leading to a more favourable Sharpe ratio.
2. What are the implications of using a stop-loss strategy on momentum investment strategies?
For momentum strategies, a stop-loss strategy can drastically reduce losses and increase returns by selling assets that hit a predetermined loss level and reinvesting in safer assets. This approach helps to tame momentum crashes, allowing for higher and more stable returns over time.
3. How should dividends be accounted for in a trailing stop-loss strategy?
When implementing a trailing stop-loss, it’s important to adjust for dividends. Since a stock's price drops by the amount of the dividend on its ex-dividend date, you should add the dividend to the current stock price when calculating whether the stop-loss level has been breached. This ensures that normal dividend payments do not inadvertently trigger the stop-loss.
4. Is there a preferred frequency for evaluating stop-loss triggers?
It's advisable to check for stop-loss triggers monthly rather than daily. This approach reduces transaction costs and avoids the over-trading that can erode returns. Monthly evaluations strike a balance between reacting to market movements and maintaining strategic discipline. Weekly may be more appropriate for momentum strategies.
5. Can stop-loss strategies be integrated with value investing principles?
Yes, while stop-loss strategies are typically associated with momentum strategies, they can also be adapted for value investing. For instance, a fundamental stop-loss could be used, where selling triggers are based on deteriorating business fundamentals rather than stock price movements alone. This can help value investors limit losses when a company's underlying business starts to decline.
