Episode 6: What Is a Stop-Loss—and How Should You Use It?

Investing is exciting, but it also comes with risk. One of the smartest habits young investors can develop early is knowing when to sell. That’s where the idea of a stop-loss comes in.

What Is a Stop-Loss?

A stop-loss is a rule you set for yourself that says:

“If this investment drops to a certain point, I will sell it to avoid losing more money.”

It’s like having a safety net. The goal isn’t to predict the future—it’s to protect your money if things don’t go as planned.

How We Recommend Using a Stop-Loss

For money you are actively managing or trading (which we think should be no more than 20% of your total investments), we recommend a simple rule:

If a stock falls 15% from where you bought it, you either sell it or add more money to increase your position intentionally.

Why 15%?
It’s big enough to ignore normal day-to-day price swings, but small enough to prevent a small drop from turning into a disaster.

And if you choose to add more, make sure you’re doing it for a good reason—because you’ve re-evaluated the company and still believe in its long-term potential, not because you’re hoping it magically rebounds.

What You Shouldn’t Use a Stop-Loss For

A stop-loss is not for long-term investing—especially not in retirement accounts.

For example:

• If you own broad market ETFs in your retirement plan (like a 401(k) or IRA), you generally should not sell just because the market has a bad year.
• Markets go up and down—history shows they recover over time.
• Long-term investing is about patience, not quick reactions.

Why This Matters

Learning how to manage risk is just as important as choosing what to invest in. A stop-loss helps you:

• Avoid big, unnecessary losses
• Stay disciplined
• Not let emotions make decisions for you

Think of it as a tool that keeps your investing strategy on track.