What is a Loss Limit?

You’ll pick winners and losers in the stock market, but a loss limit will help prevent the losers from doing too much damage to your portfolio.

You can’t avoid risk in the stock market. But you can set a loss limit to help contain that risk. A loss limit is the point at which you sell your stock if it drops in value. 

There’s no question that knowing when to sell a stock is the trickiest part of investing. But selling stocks before they can do serious damage to your portfolio is a way to preserve the gains among your winning stocks.

We set a loss limit of 10% to 20%. That is, if any stock closes out a day giving us a loss of 20%, we’ll sell the next day. Note that we wait for a loss to materialize at the close of the day. Intraday volatility these days is huge, and sometimes a 20% loss during the day can shrink below that level by the close. 

There’s no hard and fast rule about where you need to set these limits; it’s largely dependent on the level of risk you’re comfortable with. While 10% might work for us, you may be more comfortable with a 5% limit. You can even move your loss limit for specific stocks or market conditions, though we recommend a 20% loss limit as the absolute maximum.

In any case, by setting strict rules on when to sell a losing stock, you take emotion out of the equation. Even in the best of times, you want to consider how much of your hard-earned money you have at risk, and how you’ll handle your stocks should they head south. 

To learn more, download our free report, 10 Forever Stocks to Buy Now–and How to Find the Best Growth Stocks.