Economy
Are Stop Losses for Wimps?
By Steve Brice
When I started out in banking, I was based in a dealing room advising traders on potential positions to take. The positions were focused and generally very short-term in nature. Therefore, risk management was not a ‘nice-to-have’, it was vital to job security. When entering a trade, a stop-loss – a level at which the position taken would be unwound if it was losing money – was a must.
It was against this backdrop that a former colleague quipped that ‘stop-losses are for wimps’. He was of course referring to certain stocks in his portfolio which had fallen dramatically – he was probably justifying to himself why he should keep it! However, it raises an interesting question: Should we employ stop-losses when we invest?
While many people will be very passionate about this topic, as with most things in life, context is key. If you think about it, the existence of the stop-loss is a hedge against the fact that nobody knows what is going to happen and therefore you need to build in a circuit-breaker to avoid the behavioural biases that come with a loss-making position – the ostrich, or ‘head in the sand’, syndrome.
So, how does this translate for an average investor? I would argue that there are two dimensions to consider: the nature of investments being discussed and your time horizon. Let’s take each in turn.
I have a much greater conviction level that a diversified ‘foundation’ allocation (which includes exposure to different asset classes such as stocks, bonds, gold and private assets), or even a diversified equity portfolio, is more likely to rise over a given period of time than any individual stock.
The reason is simple. Different asset classes have different drivers and hence are usually uncorrelated in their moves. Therefore, just combining them into a portfolio smooths out the bumps and increases the probability of positive returns for the portfolio as a whole.
When it comes to the stock market, there are also different drivers that determine equity market or individual stock returns, but let’s simplify them into broad market drivers and idiosyncratic drivers. If the economy enters a recession, then most stocks will fall sharply in value. However, a company’s failed product launch will largely hit one stock, and those of a few of its suppliers. Its impact on the overall market will be much less severe.
This brings me to Principle Number 1: The broader the investment, the less likely a stop-loss is warranted and that a buy on dips approach makes sense.
A very good friend of mine recently questioned how applicable this ‘buy on dips’ approach was to stock markets outside of the US. So, we ran the numbers for some major global and Asian markets in terms of probability of positive returns over different time horizons and the potential size of returns for investors. The results are pretty interesting.
First, the historical probability of positive equity market returns across any given 12-month period, at around a two-thirds probability, is generally similar across major global or Asian indices – China is an outlier at just 55%. If you extend your time horizon to 5 years, this probability generally increases to around 80% – the outliers are Japan’s TOPIX (66%) and India’s Sensex (92%).
Second, we looked at what has happened after a 10% or 15% market pullback. Focusing on the 1-year time horizon, we can break the countries into 3 groups:
1) either the probability of positive returns or size of average return or both have increased significantly after a market sell-off. Markets that fall into this group include the US, Germany, UK, India.
2) there is no material change in either variable. This includes Hong Kong, Malaysia and Korea. Once you lengthen your time horizon to 5 years though, they all move into the first group.
3) the probability of positive returns or their average quantum actually declines after a sell-off. Japan and onshore China markets fit into this group. On a 5-year time horizon, China also moves into the first group but, interestingly, Japan stays firmly in group 3.
Hence the conclusion is: outside of Japan, the ‘buy on dips’ mantra has made sense, especially when held by long-term investors.
The above analysis highlights the importance of the last factor: time horizon. The dealing room environment generally takes narrow exposures over a very short time horizon. Thus, stop-losses are crucial. However, I believe the message for the average investor is the reverse as long as they are focused on a diversified foundation allocation with a long-term focus.
Structural thematic investments also potentially fall into this category. The longer your time horizon, the more likely your investment is to generate positive returns as long as the structural fundamentals remain supportive. Here, again, instead of a stop-loss being appropriate, market declines offer an opportunity to add to longer-term thematic positions given the likelihood that declines will prove temporary.
Principle number 2: The longer your time horizon, the less desirable a stop-loss is, especially for diversified allocations or long-term structural themes.
Thus, for investors who are trying to trade the market and pick stocks, we believe a strict risk management framework including the use of stop-losses is absolutely critical to returns. However, we believe the majority of investors would be much better served by building a foundation allocation with a ‘buy on dips’ approach. Investors can systematise this ‘buy on dips’ approach through regular portfolio rebalancing – say at least once or twice a year and especially after major market dislocations to bring their allocations back to their desired risk tolerance. Such rebalancing is akin to an investor systematically “buying low and selling high” – a win-win proposition. For these investors, stop-losses are likely to get in the way of wealth accumulation.
Steve Brice is Chief Investment Officer at Standard Chartered Bank’s Wealth Management division
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange recorded a 0.16 per cent decline on Tuesday, January 21, extending its loss this week to two.
This further depleted the market capitalisation of the alternative stock exchange by N1.65 billion at the close of transactions to N1.071 trillion from the N1.073 trillion it closed in the preceding session.
In the same vein, the NASD Unlisted Security Index (NSI) slid by 4.79 points to wrap the session at 3,100.33 points compared with 3,105.12 points recorded in the previous session.
The bourse ended with two price losers yesterday led by Geo Fluids Plc, which gave up 32 Kobo to trade at N4.38 per share versus Monday’s closing price of N4.70 per share and FrieslandCampina Wamco Nigeria Plc, which depreciated by 15 Kobo to close at N39.50 per unit compared with the previous day’s N39.65 per unit.
On the second trading day of the week, the number of deal carried out slightly went up by 8.3 per cent to 13 deals from the 12 deals executed at the previous trading session.
Also, the value of transactions increased by 97.2 per cent to N4.5 million from the N2.5 million recorded a day earlier, while the volume of securities traded in the session declined by 71.6 per cent to 183,780 units from the 767,610 units recorded on Monday.
FrieslandCampina Wamco Nigeria Plc remained the most traded equity by value (year-to-date) with 4.1 million units worth N162.9 million, followed by Geo-Fluids Plc with 9.1 million units valued at N44.0 million, and 11 Plc with 55,358 sold for N14.5 million.
Also, Industrial and General Insurance (IGI) Plc closed the day as the most active stock by volume (year-to-date) with 25.3 million units worth N5.9 million, trailed by Geo-Fluids Plc with 9.1 million units sold for N44.0 million, and FrieslandCampina Wamco Nigeria Plc with 4.1 million units valued at N162.9 million.
By Adedapo Adesanya
Pressure further mounted on the Nigerian Naira in the different segments of the foreign exchange market on Tuesday, making its value to shrink against the United States Dollar at the close of business.
In the Nigerian Autonomous Foreign Exchange Market (NAFEM), the domestic currency crashed against its American counterpart during the session by 0.18 per cent or N2.73 to settle at N1,552.78/$1, in contrast to Monday’s closing price of N1,550.05/1.
But against the Pound Sterling and the Euro, the local currency traded flat in the official market yesterday at N1,906.98/£1 and N1,613.48/€1, respectively.
As for the black market segment, the Naira weakened against the Dollar on Tuesday by N5 to sell for N1,670/$1 compared with the preceding day’s value of N1,665/$1.
Meanwhile, the cryptocurrency market heaved a sigh of relief during the session as President Donald Trump created a crypto task force dedicated to “developing a comprehensive and clear regulatory framework for crypto assets.”
The task force will be led by Commissioner Hester Peirce, a long-time advocate for the crypto industry, and will work closely with the crypto industry to develop regulations. This is after Mr Gary Gensler, an opponent of crypto, officially stepped down as chairman of the US Securities and Exchange Commission (SEC) after Mr Trump’s term started.
The task force will also work with Congress, providing “technical assistance” as it crafts crypto regulations.
Solana (SOL) recorded a 9.2 per cent growth to sell at $257.09, Dogecoin (DOGE) rose by 7.6 per cent to $0.36789, Ripple (XRP) added 4.0 per cent to finish at $3.18, and Bitcoin (BTC) increased by 3.7 per cent to $105,515.03.
Further, Binance Coin (BNB) appreciated by 2.8 per cent to close at $699.01, Cardano jumped by 2.1 per cent to trade at $0.9972, Ethereum (ETH) soared by 2.0 per cent to settle at $3,308.21, and Litecoin (LTC) went up by 1.5 per cent to end at $116.72, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) closed flat at $1.00 each.
By Adedapo Adesanya
The price of the Brent crude oil grade went below the $80 mark on Tuesday after it shed 86 cents or 1.1 per cent to trade at $79.29 per barrel after the US President, Mr Donald Trump, signaled the possibility of his country boosting its oil production.
This move raised concerns of higher US output in a market widely expected to be oversupplied this year, with the US West Texas Intermediate (WTI) crude futures falling by $1.99 or 2.6 per cent during the session to $75.89 per barrel.
On his first day in office, the US President signed an executive order to unleash America’s energy by easing the barriers to oil and gas extraction and production and revoking a series of climate orders by former President Joe Biden.
As pledged in the campaign, the executive order follows the declaration of a national energy emergency.
The declaration includes measures to expedite energy infrastructure delivery, and emergency approvals by agencies “to facilitate the identification, leasing, siting, production, transportation, refining, and generation of domestic energy resources, including, but not limited to, on Federal lands.”
This will likely confirm expectations that the oil market will be oversupplied this year after weak economic activity and energy transition efforts weighed heavily on demand in top-consuming nations the US and China.
President Trump also said he was considering imposing 25 per cent tariffs on imports from Canada and Mexico from February 1, rather than on his first day in office as promised.
The delay helped ease concerns of an immediate tightening of the market among US refiners, many of which are geared to process the type of crude oil supplied by these countries.
The US Energy Information Administration (EIA) reiterated on Tuesday its expectations for oil prices to decline both this year and next.
On its part, the Organisation of the Petroleum Exporting Countries (OPEC) projects robust demand growth in the world both this year and next.
In 2025, OPEC says demand is set to grow by 1.4 million barrels per day leaving its projection unchanged from the December report.
However, losses were also limited after the US president said his administration would “probably” stop buying oil from Venezuela. The U.S. is the second-biggest buyer of Venezuelan oil after China.
Also weighing on prices on Tuesday was the potential end to the shipping disruption in the Red Sea.
Yemen’s Houthis said on Monday they will limit their attacks on commercial vessels to Israel-linked ships provided the Gaza ceasefire is fully implemented.
-
Feature/OPED5 years agoDavos was Different this year
-
Travel/Tourism8 years ago
Lagos Seals Western Lodge Hotel In Ikorodu
-
Showbiz2 years agoEstranged Lover Releases Videos of Empress Njamah Bathing
-
Banking7 years agoSort Codes of GTBank Branches in Nigeria
-
Economy2 years agoSubsidy Removal: CNG at N130 Per Litre Cheaper Than Petrol—IPMAN
-
Banking2 years agoFirst Bank Announces Planned Downtime
-
Sports2 years agoHighest Paid Nigerian Footballer – How Much Do Nigerian Footballers Earn
-
Technology4 years agoHow To Link Your MTN, Airtel, Glo, 9mobile Lines to NIN