How To Keep Your Portfolio From Plunging Too FarSusan Scherreik
With stock indexes hitting record highs, investors are wondering whether it's time to cash in their holdings. But the problem with bailing out when the going is still good is that you may forgo future gains. On the other hand, a winning stock could fizzle, wiping out profits or causing losses.
A way around this dilemma is to use a protective stop order. This often-overlooked strategy involves placing an order with your broker to sell shares in a particular stock automatically if the price slips to a predetermined level. The order itself costs nothing; you just pay trading commissions. "Stop orders not only limit losses but can lock in profits," says Douglas Raborn, who manages $90 million for individuals and retirement accounts at the Delray Beach (Fla.) investment firm bearing his name. Say you purchased Conner Peripherals, a leading computer disk-drive maker, at 15 in 1992. The stock peaked at 251 2 in January before plunging to 9 in October. By placing a stop order at 201 2, about 20% below the high, you would have preserved 52% of the profit.
Stop orders can take the anxiety out of tough selling decisions. "They avoid having your broker call and say: 'We're down seven points, what do you want to do?'" says Robert Clear, a broker at Smith Barney Shearson in Morristown, N.J. Another option is to employ stop orders to buy choice stocks during market dips. This entails placing an order to buy a stock at $20, say, when the present price is $25.
NO GUARANTEES. Discount and full-service brokers accept stop orders for all listings on the New York and American stock exchanges. Many also allow them for over-the-counter stocks on a limited basis. Charles Schwab permits stop orders for the 600 most-traded NASDAQ listings.
A stop order isn't an ironclad safeguard. For instance, you're not guaranteed an exact selling price, so your shares could be sold for less than the preset level when trading is extremely heavy. Another drawback is that a temporary price decline could trigger your stop order, causing you to miss out on the stock's rebound. Placing a stop order 10% to 20% below a stock's recent high price can help prevent unwanted sales, investment pros say. Raborn puts stop orders 20% below the stock's best level since the purchase date. "We have found this is a wide enough band so that you won't lose your good stocks," he said.
Don't confuse stop orders with stop-limit orders, which dictate a stock be sold only at a specified price. The problem is that if your stop-limit order is at $93 and the stock trades at $94 and then skips to $92, your order will be ignored.
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