Are you trapped in some stocks that you don’t really want to own anymore but don’t know what to do with? Are you constantly checking quotes, hoping for an up day for the market just to sell into strength?
Well, relax and take the guesswork out of the picture. Set a limit order and a stop-loss, and forget about it.
Modern investing comes with many pitfalls and challenges, but one of the biggest assets retail investors have is complete control over electronic trading through their broker.
Some folks think this simply means you can buy whatever stock you want whenever you want to, rather than calling a human broker — and that part of it is true. But it also means small-time investors have access to computerized trading.
And that gives you the freedom not just of more time, but also of less stress.
A common investing mistake is getting overly emotional about your positions. Human nature is to sell at a low and buy at a top, which is the exact opposite of what you should be doing. So a better course of action is to use your brain and plot a logical entry and exit strategy — then give marching orders to your electronic broker.
That way, you don’t talk yourself out of a good strategy and into a bad trade based on the heat of the moment.
Let me give you a real-world example: I bought Alcoa (NYSE:AA) at the end of 2011 with the naïve hope of a secular recovery that would gain momentum in the latter half of 2012. That pick proved to be at best very premature, but thankfully my cost-basis was around $8.65, so I never endured too much downside. But with my money tied up in AA stock, I was missing out on other opportunities.
So in 2013, after riding the Alcoa roller coaster for over a year, I decided it was time to cut and run. I set a limit order to sell at $9.15, a modest 5% gain well within the 52-week range. Then I also set a stop-loss of $8.25 to limit my losses to just 5% should the market implode or some horrible headlines pop up.
Then I forgot about the position.
My order fired at $9.15 … and in all honesty, I didn’t even know I had sold out until I checked my brokerage account recently and noticed Alcoa missing from my portfolio.
I could have watched AA break above $9 and then convinced myself maybe it would go to $9.50 or even $10. But I didn’t. I also could have still been holding Alcoa today, after the big market decline, and started fretting about downside risk.
But I didn’t have to. There were no hourly quote queries, no stressful market-watching to find the perfect moment to sell … I just let the computer do the work.
This idea cuts both ways, too. I am not a momentum investor, so typically I identify stocks I believe are undervalued with big long-term potential — and then I set a limit order to buy on an inevitable dip. I a pick and plot a fair price, then let the robot do the work.
And after I get filled? I set a generous trailing stop just in case.
There are risks to this strategy, of course. If you refuse to buy above a set price, you could miss your opportunity as a good stock keeps moving higher and gets away from you. Similarly, a stop-loss can be triggered on a brief dip and then make you furious as shares rebound and move upward once more.
But the benefits of this technique are that you are plotting an entry or exit price in the cold light of day and without the emotion of intraday swings.
Sure, big news and market events may force you to reconsider your strategy — and every investor should reassess his portfolio regularly based on the latest conditions. But overthinking it can be not only stressful but also counterproductive as you rack up the fees by churning your portfolio.
Sure, swing traders with five screens can probably make good money by watching every little blip in the market. But the vast majority of us are simply investing for retirement and for long-term gains.
If you lack the time, sophistication or cast-iron stomach of daytrading, consider using more limit orders and stop-losses to save you time … and money.
- In case you don’t know how a limit order or stop-loss works, here are some primers. (Investopedia)
- On trading too much, and how it’s counterproductive. (The New York Times)
- Why market timing is foolish. (CNN Money)
- My 2013 resolution has been to chill out … and it may be working. (The Slant)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.