Volatile markets are triggering many people's stop losses.
Stop losses are for pansies. That's what my Motley Fool editor, in a rare burst of machismo, has told me. This makes me feel bad, because the other day I set up a couple of stop losses on my portfolio, and I was tempted to set up a couple more. In fact, I was tempted to stop loss every single stock I owned (not to mention my income, mortgage, girlfriend...).
I'm clearly in a stop-loss mood. Or maybe I'm just a stop loss kind of guy. If my editor is to be believed, that isn't a very creditable thing to be, even in dangerous times like these.
Perhaps especially in times like these.
I'm not proud. I'd rather be a rich pansy than a broke tough guy. The trouble is that setting up a stop loss does far worse things than impugn your manhood. When I look at how they've worked for me in the past, they have lost me a lot of money as well.
I've never set a stop loss without it being almost instantly triggered. So what does this tell me?
1. I'm setting my stop losses too tightly
Whenever I've used stop losses on my spread bets, I have always plumped for the minimum, to shield myself from a big fat loss. That has spared me from a couple of major blowouts, but it has also stopped me from making big gains, when the stop loss triggered at the first spot of volatility, closing my position and shutting me out from the subsequent rebound.
Perhaps the stop loss wasn't really the problem. The original bet was bad, not because markets moved against me (it happens), but because I didn't have enough faith in it in the first place.
2. I have an erratic attitude to risk
What's that noise? It's the sound of my latest stop loss being triggered. One of my shares fell 5.7% in this morning's trading. I had set my stop-loss at 10% below its share price, and true to form, it pinged in just a few days.
It is pretty daft setting a close stop loss on volatile stocks such as this one was, especially in times like these. But my attitude to the stock was also horribly inconsistent. I lost my nerve, as worries over the China property bubble loomed ever larger in my mind. That was when I set the stop loss, with the inevitable result.
Again, if you have faith in your initial research, you shouldn't need a stop loss. A bit of patience also helps.
3. I don't like making decisions
I've been using stop losses as a substitute for making a sell decision. After sniffing that a stock was in trouble, rather than making the tough decision to offload, I delegated the dirty work to my electronic safety net.
Like so many things about stop losses, it is good in theory. The stop-loss limit your losses if the share slides, but if it doesn't, you are free to enjoy the subsequent upside. In practice, that has never happened, at least not to me. One reason why may be found in point 1.
4. My strategy isn't clear
Funnily enough, I haven't even thought about setting stop-losses under my emerging markets investment trusts, ETFs or dividend-paying stocks such as Aviva (LSE: AV), Scottish & Southern Energy (LSE: SSE) and Tesco (LSE: TSCO).
That's because I'm investing in them for the long term, and the last thing I want to do is sell now, with markets sharply down. I now realise I should adopt this strategy with every single stock I buy.
So no more aggressive short-term bets for me, underpinned (and undermined) by a cowardly stop loss. From now on, it's buy and hold all the way. If you are investing over decades, the best stop loss is time.
So are stop losses for pansies? Who cares? My worry is that all too often, they are for people who don't have faith in what they are doing (often for a good reason). They are unsentimental traps that smoke out short-termism, sloppy thinking and rash decision swings, and for that, I should thank them. But I have no plans to use them for a long time.
More from Harvey Jones:
Harvey owns shares in Aviva, Scottish & Southern Energy and Tesco.
