Can you tell me what is wrong with the picture below?
Even a cursory glance can tell you that something dramatic happened to the markets at 1 PM E.D.T.
At 1:08, the Associated Press Twitter account tweeted that there had been an attack on the White House. Within seconds, word spread across Wall Street and the Dow plunged 145 points.
Of course, the reason why this isn’t plastered all over the media is that the tweet was a hoax; the AP account had been hacked. So by 1:10 the markets regained their ground from the flash crash.
I think I can speak for us all in saying that I’m relieved that the tweet was nothing more than a hoax. But while the scare may have been a fake, the lesson it taught us is very real (other than protecting our Twitter accounts!). The market is prone to knee-jerk reactions, and if you have hard stops in place, this can be a problem.
Stop losses can lock investors out of a stock prematurely—you can get bounced out on a sharp dip, and miss out on the rally afterwards. And let me tell you, it’s not a good feeling to see a strong stock surge right after you stopped out.
This is why I don’t usually use stop losses, especially when it comes to a conservative investing strategy. Stops may help short-term performance and can be used effectively by active traders, but rarely hold a place in a long-term buy and hold strategy.
So I want you to keep this in mind as we enter the choppy summer months. While I don’t expect to see another intraday drop like this, we very well could see dramatic market swings on nothing more than seasonal volatility. Instead of relying on stops, I strongly recommend that you follow these five steps if you’re ever faced with a selloff.