You’ll like this story. I was catching-up with a client this morning who had been out in Colorado during and after the Brexit vote. He asked what he missed while he was gone. “Well,” I replied, “as it turns out, not much.” My client already knew that, but he knows I despise using stop-losses so we had a good laugh at the expense of the stop-loss crowd.
And a crowd there is in the stop-loss world.
As a refresher, a stop-loss is an order to sell a stock when it falls below a certain price. I will not use them. It’s a strategy the hedge funds love, and one that makes me uneasy.
What ends up happening with stop-losses is a position is stopped out on the way down (see chart) and, more times than not, not repurchased on the way back up.
That’s exactly what happened during Brexit to a lot of so-called experts. The stop orders went crazy: sell, sell, sell. But the buyers disappeared. And the prices plummeted. Because buyers know a stop-loss when they see it and know it does not guarantee a stop sale. It’s a wish, not a confirmation.
So the Brexit stop-loss losers needed to get in the back of the queue, if you will. And all of the sales made in taxable accounts are now a taxable event with taxes due in April 2017. More costs are generated from the transaction fees (both ways eventually). A much saner way to invest is to own stocks that pay dividends—survival stocks that pay you—while you go to Colorado and forget about Brexit and the stock market for a while.