You may remember that there are 4 — and only 4 — investment outcomes. You can experience: (1) a big gain, (2) a small gain, (3) a small loss or (4) a big loss.
At Pacific Park Financial, we seek to eradicate the possibility of the “big loss.” How do we do it? We protect your individual assets with stop-limit orders.
A “stop-limit” is a pre-exisiting mandate to sell a holding if it falls a significant percentage from a recent high. In essence, we decide ahead of time what it will take to secure a beneficial outcome for each asset.
For example, let’s assume that oil-producing companies in the Middle East are curbing production and that China is stimulating its economy through infrastructure spending. With this information at hand, one might be inclined to invest in a basket of energy corporations like the SPDR Energy Select Sector Fund (XLE).
Next, consider the possibility that XLE rises from $60 to $90, then hits a 10% stop-limit order at $81. The investor would realize a 35% gain.
Why shouldn’t the investor hold-n-hope instead of executing a “stop-limit?” Simply put, an investor’s best laid plans can go astray. In 2008, XLE dropped a bone-crushing -50% from an adjusted price of $90 to $45.
Using “stop-limits” is not synonymous with “day trading.” At Pacific Park, we use them as a protection mechanism for managing extreme levels of volatility.
Moreover, stop-limit orders are far from perfect. You may get “stopped out,” only to learn that your investment skyrocketed… shortly after you sold it.
Nevertheless, investment success always comes back to what you can control. And more often than not, a stop-limit order will ensure a beneficial outcome. Best of all, “stop-limits” can minimize the possibility of a bearish scenario where one winds up with a -50%, -60% or -70% disaster.
Now see how stop-gain orders can be used to lock in profits in your portfolio!