Ask Colin

Should I raise my stops in a market decline (29 June 2015)?

The detailed question was:

I am finding that my shares bought in recent months when they were trending nicely upwards have all started to slide with the market.

If I keep my original sell stops, and if the market continues to fall, my combined losses will be greater than I am comfortable with. Since this scenario is increasingly likely, I am inclined to raise my sell stops.

However this may cause me to sell the stocks sooner, and so precipitate a situation where I am stopped out of multiple stocks. But if I take no action I may still be stopped out of multiple stocks later, in which case I will face greater losses.

I can only offer you the most general advice on this issue. There are also 60 questions and answers on stops on the Ask Colin page some of which may also be helpful.

 

The most important objective in investing should be preservation of capital. This is explained on pages 17 and 18 of Building Wealth in the Stock Market. It is also  the reason for my Capital at Risk calculation on my Portfolio Summary – see Portfolio Details on the website. The calculation  is explained in the document on the Investment Plan Changes page. My upper comfort level is <20%, but yours might be lower. Mine is sitting at 17.11% now. Note that it falls as the market falls, which is deceptive. It is its peak level that is important to watch.

 

Next is the old Wall Street proverb is to “sell down to the sleeping point”—that is, only assume the risk that can make you sleep comfortably at night, without excessive worry. So, if you are unsettled about your current exposure, reduce it. You might sell some stocks or you might sell some of each stock you hold. Only you can decide that.

 

Raising stops is in my mind not logical. If your stops are set as mine are on the principle of where you are wrong about your investment (what you expected to happen is no longer happening) then to move them higher means putting stops where you are still correct about your investment. I think you are better to sell the whole holding or to sell part of the holding as described above.

 

If you do sell all or part of your portfolio, remember that we are in that part of the year when markets tend on average to be volatile and trend down. You know that I expected the current correction and it is so far unfolding fairly benignly – the uptrend is still in place and the correction has not so far fallen further than I expected – see the Weekly Market Charts and Analysis documents on the website. So, the correction in the market will throw up buying opportunities between now and October. Be ready to buy when you see bargains. I have 14% of my portfolio in LICs that can be sold quickly to buy stocks when the time is right. I might have more if any existing holdings are stopped out.   

 

The current turbulence in the stock market is driven by the Greek crisis. Ask yourself how the crisis in Greece will affect the businesses you have invested in. I have asked myself that about each stock I hold and I cannot see that any of them have a significant involvement in Greece. So, what is happening is herd behaviour by traders rather than substantive fears for investors, who should be focussed on the business of each company they hold rather than its stock price. Irrational market falls throw up great opportunities for investors. See my article Shopping in the Stockmarket on the Educational Articles page on the Free Resources menu. 

 

These comments are directed to you assuming that you are an investor and have that mindset. If you are a trader, then your whole focus will be on price because your objective is totally focussed on exploiting changes in the price of the stocks.

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