Skip to Content
ETF Specialist

Stop-Loss Orders: A False Sense of Security

Rather than "insuring" your portfolio, you could be "ensuring" a loss.

The dust is still settling and fingers are still being pointed in the aftermath of what is now being called the "flash crash." Sorting out the mess will require much time and likely result in more fingers being pointed in multiple directions, but we simply have to accept the fact that markets will occasionally suffer bouts of extreme volatility--and be properly prepared to ride those waves until calmer waters prevail. 

While at this point there seems to be more questions than answers, we can't help but feel for some of the unsuspecting victims of this erroneous market action. But the first step in avoiding disastrous results in the short term is to avoid taking potentially perilous actions. Followers of Morningstar's exchange-traded fund research are more than likely familiar with our strong preference toward using limit orders when executing ETF trades. This helps ensure that you get a price at or extremely close to the fund's net asset value. After all, in a properly functioning market, a fund is worth simply as much as its constituent parts. If you are selling and not getting something very close to fair value, we would recommend not selling at all.

To view this article, become a Morningstar Basic member.

Register for Free