set a stop loss on stocks / mutual funds?

[B Buddy]

I recently bought a bunch of stocks and emerging market mutual funds. What's a good stop / loss in general on these things, if any? I noticed I can do limit orders on my stocks, so I could possibly put in a limit 60 day order to sell on each indiv. stock if it goes down 5% or more of the original investment, once every couple of months (or not). Since emerging markets can be high variance, is it possibly a good idea to set up a plan where I sell if they go down 5% and buy back if they go down antoher 10% or something like that? Maybe I just need to go through each stock and identify a sell point, and update it weekly or monthly or something. I'm basically a long-term investor and I can handle some variance. I'm sticking with a stop loss tentatively on my ind. u.s. stocks while I'm learning the ins and outs of the stock market a bit better, but I don't have any plans right now for a stop loss on any mutual funds. I have about 20 different U.S. stocks, and around 8 different mutual funds, 1/2 which are emerging markets.

Any tips on limiting / managing your losses?

Thanks

[JJay1231]

try using a volalitlty based stop like the "Average True Range"

eg, if stocks current price is $5.00 and the average range of the stock is $.50 over the last 5 days, then you can place your stop 2 X the ATR which would be $4.00. If you want a bit more room, you can try a 3 or 4 ATR. ($3.50 or $3.00)

The ATR stop should only be moved upwards and only if the stock is making new highs or higher closes. If the stock stalls, leave the stop where it is until it stops you out or if it starts to make new highs or higher closes, then you can move it upwards again.

Trade Your Way To Financial Freedom" by Van Tharp goes into more detail with ATR stops.

[ThePost]

One theory is that stop losses are just like making automatic bad decisions. Since if it was worth purchasing at $5.00, isn't it now a bargain at $3?

Seems to make sense, but I'm sure others have more information about other theories in this area.

[DesertCat]

[ QUOTE ]
One theory is that stop losses are just like making automatic bad decisions. Since if it was worth purchasing at $5.00, isn't it now a bargain at $3?

Seems to make sense, but I'm sure others have more information about other theories in this area.

[/ QUOTE ]

If you are a value investor, i.e. you believe your investments have a certain "intrinsic value" and you are buying at a substantial discount to that value, you wouldn't sell when the discount got even greater. You might buy more depending upon your portfolio allocations and limits.

A value investor will sell when the price approaches intrinsic value, or if they decide their original research was wrong and intrinsic value is at or below current prices or they can no longer determine what intrinsic value is for this investment with any level of confidence.

If you aren't a value investor, i.e. you have no idea what the stocks are really worth, you are trying to predict price action, stop losses make sense. If you bought a stock thinking it was going up in the short run, the stop loss is a convenient way to automatically exit from mistakes with minimal losses.

[DcifrThs]

BBuddy,

everybody so far has assumed that you have market beating skill in picking the stocks and mutual funds.

if this is the case, then the advice so far is pretty good.

if this is not the case (and i suppose it isn't given the OP) then the advice given so far i don't think fits with your situation. you shouldn't be trying to limit volatility via stops or time the market at all if you don't have market beating skills.

if the volatility in the EM funds is too high for you, add exposure to some lower vol fixed income funds/ETFs. this would both diversify your portfolio and reduce the volatility and return (the latter may sound bad but if you are not comforatble w/ the volatility in your portfolio, then you are probably shooting for returns that are too high given your risk tolerance).

given the fact that you are a long term investor, and the assumption that you cannot beat the market by any significant measure by yourself, stop losses make no sense. the best you can do is construct a portfolio that fits your preferences and make the minor adjustments to it as you go.

hope this helps,
Barron

[Mark1808]

The Mr. Market analogy will help explain while value investors do not use stop losses:

http://en.wikipedia.org/wiki/The_Intelligent_Investor

[stoxtrader]

possibly nitpicky - don't put in a limit order to sell down 5% because it will be immediately marketable!

put in a stop-limit or stop-market order down 5%, which will use a trigger to become active.

[pig4bill]

Here's another area where everyone can benefit from learning some T/A. Say you've decided to buy stock X. By examining the chart, you see it's near resistance. The prudent move would be to watch how it handles the resistance. If it breaks through, great, you can buy it. You may have lost a bit by not buying it sooner, but now it's shown it's strength and you have a well-defined area to place a stop (the former resistance, which is now support). If it drops when encountering the resistance, you can buy it when it nears an area of support. Again, you have a well-defined area to place a stop.

[B Buddy]

My concern about the emerging markets funds is a possible bubble, although I think it's likely if it does happen it will be awhile. I don't mind being in the bubble, I'd like to be in the bubble if there is one but I want to get out when it busts. I have heard and read a bit of discussion lately about this possiblity. I'd like to be making money over a five year time period. And, I was just looking over a graph of the nasdaq where it was at 5000 in y2k and it's now only at 2700 7 yrs later. That's the type of thing I'd like to avoid. And, if I"m n ot mistaken, housing was the latest bubble. So if I take a 10% hit I might sell my EM stuff until i think it's bottomed, although I can be convinced this is a bad stategy if it's not a good idea. I don't want to sell this stuff without a big downdturn because I think it has high potential for a big return. Specifically, I'm invested heavily in China, and lesser so in Russia and Latin America. I want to get an India fund next year.

If I did not think I could beat the markets, I would not have cashed my u.s. index funds out and picked up the em funds and individual stocks. I did reasearch this stuff for about a month, getting a lot of expert analysis on the stocks, funds, markets; Although I won't be surprised if I don't beat the market my fist year picking stocks, I think I have a good shot. But since I am new at this I guess your assumption that I don't have the skill to beat the markets is a good one for the purpose of the question. My strategy on the U.S. stocks was to basically take picks from S&P & charles swhaab, who claim to have a track record of beating s&p by a wide margin on their top stock picks. I also checked out a lot of other opinion's on my picks from places like Goldman Sach's, Argus, Morning Star, and First Call, etc. As far as the EM funds go, I'm a lot less certain about how those will do cause most of the experts I'm seeing seem to prefer to invest in U.S. based companies that do a lot of business overseas, and maybe buy just a small % in emerging markets stuff.

Nasdaq graph:
http://en.wikipedia.org/wiki/Image:N...ical_graph.svg

Any more tips?
Thanks

[Jimbo]

DJIA Jan 1997 6,813.09
JUNE 19 2007 13,635.42

Jimbo