So the market sucked today. Let’s be positive and discuss a way to minimize losses during these inevitable “corrections.” 

Meet a little trick called the Stop-Loss Order. This is an order to sell your investments if they drop below a certain point. You can set it for a percentage or for a certain price. 

For example, say you buy Widget Stock at $100 per share. You can tolerate some loss but no more than 10% so you set a Stop-Loss Order to sell if the price drops 10% below your purchase price of $100, or at $90.

Or perhaps you can take a little more fluctuation but no more than $25 per share in losses. So you set a Stop-Loss Order to sell at $75 per share. 

During a huge correction like we saw today, you could have set your Stop-Loss Orders so that you wouldn’t lose any more than 10% of your portfolio value. You can always buy these assets later when conditions improve – although don’t wait too long and buy high of course! 

Stop-Loss Orders are standing orders. You can set them and forget them. They stay in place. The order is simply an option that you check off on your order page when purchasing investments. You can use them when purchasing individual stocks, mutual funds, ETFs, and more inside your money market account, 401(k), IRA, etc. They apply to almost all portfolio investments. They don’t cost a thing. You can also set them any time after you’ve purchased the investment and that may or may not cost you, depending on your brokerage. 

Stop-Loss Orders are not only for minimizing loss. They can also be useful for insuring gains. This is called a Trailing Stop-Loss Order. This is a sell order that trails the price of your stock, regardless of what price you purchased. 

Here’s an example of a Trailing Stop-Loss Order: Say you bought Widget Stock at $100 and it shoots up to $120. Hooray! You want to make sure you’re insured at least part of that gain so you set a Trailing Stop-Loss Order at 5%. This means that if the price drops by 5%, you sell because you know that you’d be happy with a $14/share gain. 

There are some disadvantages to Stop-Loss Orders. They do not allow for temporary corrections. If the market has a short blip, you’ve already panicked out and you’ll have to pay to buy your assets back. That is why you should set them at your very lowest level of tolerance. 

Also, these orders are typically not allowed for penny stocks but we’re not buying penny stocks, right? 

Stop-Loss Orders are an underrated trick for minimizing your risk during large market corrections. But today is probably not the time to set your Stop-Loss Orders given your investments are probably already below the price you might have set to sell. That’s okay. Take a breath, drink a drink, and let’s wait it out. 

History tells us that market corrections happen every decade. BUT some economists predict that our current market will crash every 5 years now. So fun! That is why it is prudent to have some tricks up your sleeve like Stop-Loss Orders if you are going to invest in the market. 

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