What is a stock market Stop-Loss?
To explain the process of a Stop-Loss, let me tell you about our family cabin in northern Wisconsin. It sits along the slowly moving river, deep in the middle of the woods. In a word, it’s a quiet, relaxing place to get-a-way. When we’re not there the bears, deer and racoons roam freely without being bothered by the occasional human visitors.
But, us human visitors want to make sure that the family cabin is safe from the elements of nature; so, we have this small device that takes regular readings of the inside temperature and humidity of the cabin, along with an indicator, as to whether the electrical power has been interrupted. Most winter months, you’ll see the temperature while we’re away hovering around our pre-set 55-degree thermostat, followed by peaks of seventy degrees during weekend visits.
During last week’s polar vortex, my phone received a text alert that the inside temperature had dropped to forty-seven degrees, which was my pre-set emergency notification. Something was wrong and we needed to do something, before having to worry about frozen pipes and the mess that can go along with it. I made a telephone call to our HVAC guy who arrived to inspect and repair our heating system; problem solved.
A market stop-loss may do the same thing. Ask yourself what level of pain will you bear in an investment before it becomes a problem? Does the investment automatically call in a repairman to stop the problem from getting worse or are you sitting without an onboard notification that sends an alert AND stops the loss, whether it’s a ten, twenty or thirty percent reduction in the value of your account. It’s something to consider – a stop loss.