Author Topic: Stop Orders and ETFs as "protection"?  (Read 810 times)

Frznrth

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Stop Orders and ETFs as "protection"?
« on: September 19, 2018, 08:13:35 PM »
Hi
I have a small amount, 15k, that I would like to invest. My time window is as short as 7 years but might stretch out to 15. I'm almost 50 with a defined public service retirement waiting. I want this small investment to grow to be something "extra" for retirement. I will be adding around $750 to the 15k each month. I'll do this in my TFSA until it maxes out.  I'm Canadian. 

I want some "protection" against any possible sudden market meltdowns.  And I'm wondering if Stop Orders would do that.  I know that there is the danger of having it automatically sell and then it going back up before you can buy in again but I would much rather pay that cost than to be sitting at a 30% loss. 

What do you all think of ETFs?  Any certain ones you would recommend?  I'm willing to take more risk with this money as it would be for wants not needs.   If a Stop Oder would be a good idea what level below purchase price would you set it at?

Would I be better off in US funds and take the rate exchange ride or stay Canadian?

Thanks for your help

ILikeDividends

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Re: Stop Orders and ETFs as "protection"?
« Reply #1 on: September 20, 2018, 04:24:11 PM »
I know that there is the danger of having it automatically sell and then it going back up before you can buy in again but I would much rather pay that cost than to be sitting at a 30% loss. 

Another risk with stop orders is that if the market gaps way down, way below your limit price, the first trade at that lower price will convert your stop into a market order, and it will be sold at whatever price a buyer is willing to pay you for it.

Stop orders do not guarantee that there will be a willing buyer at your stop price.  The next bid could be significantly below your stop price in a fast moving market.

I'm in the US, not Canada, so I will refrain from commenting on your other points.

From a US perspective, even if you get stopped out at your desired price, and get back in later at an acceptable price, there are still potential tax consequences to deal with for getting stopped out, unless you are in a tax-advantaged account.

I want this small investment to grow to be something "extra" for retirement. I will be adding around $750 to the 15k each month. 
I think this statement is inconsistent with even contemplating using a stop order.  If this is really just "extra," (or even if it isn't) I would definitely put it into a broadly diversified index fund with dividends automatically reinvested, keep adding to it monthly, and just forget about it until you feel like splurging on some extra luxuries at some point in the future.
« Last Edit: September 20, 2018, 09:04:26 PM by ILikeDividends »

chasesfish

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Re: Stop Orders and ETFs as "protection"?
« Reply #2 on: September 20, 2018, 05:11:58 PM »
I'm not a fan of stop-loss orders as protection, especially due to some of the flash crashes we've seen.

If you're worried about a market meltdown, you're better off to buy put options, which you pay a small amount up front for the ability to sell shares at X price.  The SYY exchange traded fund has the most active market.  Figure out how much it would cost to buy some put options that kick in once the market falls 10%.  That's one of the many ways you can hedge risk if you want to be fully invested.

Personally, I'm going to hold 10-20% in cash/short term bonds early in retirement, own a few individual stocks with less correlation to the market (NOT for amateurs), and more aggressive later in retirement once I'm past the risk of a market meltdown shrinking my retirement.  I'm leaving work 17 years before I can start collecting on a pension

Telecaster

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Re: Stop Orders and ETFs as "protection"?
« Reply #3 on: September 20, 2018, 05:24:53 PM »
Stop orders don't really work the way you need them to.  First, if the market is falling rapidly, your order won't necessary be filled at the stop price, it can, and almost certainly will, be filled at a much lower price.  The other thing that can happen in volatile markets is the price will bounce back up rapidly after your order is filled.     This is called getting "whipsawed"  Basically, it is an artifact of Wall Street traders screwing small investors.    Really all stop losses do is lock in losses. 

RichMoose

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Re: Stop Orders and ETFs as "protection"?
« Reply #4 on: September 20, 2018, 08:55:09 PM »
Frznrth, in Canada we can only set stop limit orders with our local brokerages. This may help relieve the gap down/flash crash risk our American friends talked about in their replies.

Personally I sense some conflicting ideas in your post. You talk about stop order systems to prevent 30% losses and recognize whip saw costs while at the same time saying you are willing to take more risk with this account.

More risk means higher drawdowns on your account whether that's via a larger loss on one holdings or several cumulative smaller losses on several trades. If you want lower drawdowns, you need less risky investments like a VCNS.TO or something similar.

There's also the important question of when do you buy back in if you sell a position and it turns around on you.

A put option strategy works, but it is a very pricey form of insurance that will drag down your overall returns.

My friendly opinion is you have a choice: 1) Choose a less risky automatic rebalancing ETF like VBAL.TO or VCNS.TO, or 2) Follow a Canadian Couch Potato portfolio, or 3) Prepare yourself for a huge learning curve on advanced trading strategies like trend following and options trading so you are adequately prepared for proper use of stop losses, position sizing, entry signals, etc.

Hope this helps!

Frznrth

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Re: Stop Orders and ETFs as "protection"?
« Reply #5 on: September 23, 2018, 07:26:35 AM »
Thanks - I think the automatically rebalancing ETF or the Can. Couch Potato approach would be my best options.  Glad you pointed me in those directions.  I need to sit down and get a much clearer picture of what I want and what I need for the future and how to get there.  Once I do that I'll bother you mustachios again.  Thanks again for all of your help and advice. 
« Last Edit: September 23, 2018, 08:33:48 AM by Frznrth »