You have heard the term “stop-loss” before. Many investors, often the self managers tout stop-loss orders as their method of ensuring gains or protecting against big losses. Almost always they are wrong, and the stop-loss has the exact opposite result. The result more often is to stop future gains, pay more in transactions fees, trigger taxable events at inopportune times, and simply make less money than the investor otherwise would have by taking no such action.
Let’s give the definition to make sure everyone is on the same page.
Definition: A stop-loss order is an order to sell a security when it reaches a certain price. It is designed to limit an investor’s loss on a position in a security.
I believe I have said this before, but I will say it again, “a movement in price alone is never a reason to buy/sell a security.”
The decision to buy/sell a security needs to be based on a number of factors: economic outlook, sector outlook, industry outlook, company/particular security outlook, political outlook, category outlook, market cycle analysis, and on and on, etc.
Markets typically experience a correction about every 12 months. That means that using stop orders (depending on the order price) will often force an investor to sell positions on the decline, only to watch the same positions bounce back up. All the while with no fundamental change in the underlying security’s story.
Just because a security has dropped a lot in price does not mean it will necessarily have a strong bounce. Just ask Peabody Energy. Just because markets reach all-time highs does not mean they will soon have a downfall. New record highs could continue to be hit for a long time before another bear market. Just look at about every bull market in history.
http://www.forbes.com/sites/greatspeculations/2016/07/28/turn-your-kids-into-millionaire-retirees-with-a-roth-ira/#26f71eb96723
Below is the text from an article written in Forbes. Above is the link to the article.
Forbes | 2016-07-28
I have written often on the effects of compounding over the long term, emphasizing the simple but potent message that the sooner you start, the more the multiplying effect you will experience in your investments. That’s why it makes so much sense to help your children take advantage of the benefits of compounding within a Roth IRA.
Under current law, qualified Roth IRA distributions are not taxed, no matter how much income is reported on the taxpayer’s tax return. Anyone with earned income can have a Roth IRA, even a child.
You might consider hiring your children or grandchildren to do work around the house, or, if you run a business or a professional practice, you can hire them there. The younger the kids are, the better. You’ll not only cut your own taxes today, but you’ll set the kid on a path that could lead to a multi-million-dollar retirement fund decades down the road.
The premise is simple. Money you pay the youngsters reduces your business income and thereby your income taxes. The children will owe little or no tax, which you can pay for him or her, while fully funding their Roth IRAs.
Miracle of Compounding Creates Multi-Million Dollar Wealth
Suppose that you hire your child. If he earns at least $5,500 a year, that much could be invested in his Roth IRA. (You could pay a bit more in order to cover any payroll taxes.). If he works for your business for 10 years and your business makes no further payments to him after that, he would have contributed $55,000 to his Roth IRA.
How much that investment would be worth at the end of those 10 years depends on the rate of return during that period. To get an idea, we built models to calculate returns of 6%, 8%, and 10%.
Are these returns realistic? ’s Ibbotson subsidiary tracks investment returns going back to 1926. Through 2013, large-company stocks returned 10.1% a year. Shorter durations could be much lower or much higher. Our illustrations are assuming that we are going to be invested for the very long term.
Using our three models, we figured that the $55,000 total invested would be worth $74,669 at the end of 10 years at 6%, $82,863 at 8%, and $92,039 at 10%. Keep in mind that the full $55,000 was invested for only half the time, on average. (In the first year only $5,500 was invested and in the second, only $11,000, etc., so on average only $27,500 was invested for the full ten-year period.)
But the seemingly magical effect of compounding is only just beginning! Those first years are just to get the wheels rolling.
Let’s assume an 8% average annual return inside the Roth IRA, doubling every nine years (using the Rule of 72). The initial $55,000 ($5,500 invested every year for 10 years) would be worth about $3,831,415 after another 50 years, and if the average annual return were to be 10% per year, that figure would be $10,749,493. That’s the power of compounding.
Again, how reasonable are these calculations? Even during the past 10 years, which included the “Great Recession,” the S&P 500 returned an annualized 7.98% and, over the past five years, an annualized 12.79%. As you can see, market returns vary from year to year, but over very extended periods, the broad averages seem to average out to be around 10% or better. If you can allow investments to compound over long periods of time at such average annual returns you will have amazing results!
Keep in mind that the multi-million dollar portfolio we calculated was achieved without any further investments after the first 10-year period. And if your child were able to continue to fund his or her Roth IRA account, the tax-free Roth IRA buildup is likely to be even more overwhelming.
Wall Street churns out impressive-sounding nonsense, couched in supposedly smart “academic” speak — setting investing back decades. Heck, most of the industry (helped by mass media) clings religiously to an archaic, utterly broken benchmark — the Dow!
Ken Fisher
