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Everyone with money in the stock market needs to learn about how to use a trailing stop loss. This is the ultimate hedge that let’s you participate on the way up and gets you out before the depth of any significant downturn. A TSL can be set at any %, say, 25%. If a security’s price closes at a level 25% below its previous high point, you sell it at the open the next day. It’s that simple. One important point is to keep your stops out of the market and use a spreadsheet or website for this purpose. I suggest http://www.tradestops.com as one of the best out there. This is body armor for your portfolio.
Interesting Mark Waldman, how would this work when your employer has your 401k managed by a company? Can you have the company that your 401k with do this?
If your 401(k) is managed by a company, which means they have discretion to make changes without your prior permission, you’re stuck. You might check to see whether you can opt out of the management. You would then use a website to put TSL’s on the funds you choose. One further caveat: everything works better if there is a money market fund somewhere in the plan that you can park the money in after any sales.
One further comment: some retirement plans allow participants to open a brokerage account to hold their contributions. Needless to say, they don’t advertise this, as it means more work for them. If you can do this, you would have all the responsibility for choosing your investments, and you would have a much wider range to choose from. This would allow you to use trailing stops too.