Are Stop-Loss Orders a Bad Idea?

Have you ever considered using a stop-loss order as part of your investing strategy? In this segment of Backstage Pass, recorded on Jan. 24, Fool contributors Toby Bordelon and Brian Withers respond to a member’s question and explain why stop-loss orders can actually be to the detriment of long-term investors.

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Toby Bordelon: Brian, before we get to our last question, you wanted to address the question you see in the chat. Let’s do that real quick.

Brian Withers: Yeah. ProShopGuy and it got a number of thumb-up votes, and he says that “Guessing a number of investors had their positions sold out using stop loss they set up this weekend. Computers saw the positions out there and gobbled them up. Why you should not use stop losses?”

Just let me explain what a stop-loss order is, is you can set up on an existing company that you own, an existing stock shares that you own, and you can say, “Hey, if it goes below 10%, if the price drops below 10% from where it is today, I want to sell out.” You would think this is a conservative way to reduce your loss.

Well, today is a great example why those are probably bad news, is you could have potentially triggered your stop-loss at some point during the day today, and then watch the stock climb to beyond where you owned it last Friday.

I don’t recommend stop-losses. I think that the Fool discourages them. In case you think about getting, I always love the phrase too cute by half.

Yeah. This is one of those things that to me, you’re holding companies for the long-term, and I think stop-losses are very short-term thinking.

Bordelon: Thanks for that, Brian. Thanks for that reminder. Yeah today, as you said, is a great day as to why you would not necessarily want to use stop-losses.

You don’t want to take the control away from you. Make the decision yourself, I think, is my approach.

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