The Hard Truth About Stop-Losses Most Investors Refuse to See
What feels like risk management is often the reason you keep losing money.
Are you part of the 97% of traders who lose money? If so, your stop-losses might be a major reason why.
Stop-losses is poisonous to your portfolio and one of the main reasons many of us keep losing the money we invested.
Worse, they give you a false sense of security.
“But wait, I’ve been advised to use stop-losses! Everyone uses them, right?”
Here’s what I’ll show you in this article:
Why stop-losses are almost always the wrong tool
Why you shouldn’t rely on them
How to manage risk properly
And how to actually grow your ROI and run a profitable portfolio
I have a question for you:
Do you think Warren Buffett, widely considered the most successful investor of all time, uses stop-losses?
He doesn’t. Never.
Stop-losses don’t make you money.
In fact, relying on them almost guarantees losses — and that’s exactly what we’re going to unpack.
A stop-loss is like a traffic light that only turns red
When Eddie decided to open a new restaurant, he was looking to invest $300K in equipment, staff salaries, ingredients, and menu development, while carefully forecasting revenue and his bottom line.
But there was one thing he didn’t do: he didn’t set a stop-loss.
He didn’t say: “I’m putting in $300K, but if the restaurant loses $50K, I’m shutting it down.”
No entrepreneur, or anyone running a real business for that matter, uses a stop-loss in the real world. Instead, they put in the research to understand the market, study the business, and invest only what they can afford to lose.
Why?
Because real investing, like real business, isn’t built on speculation. It’s built on conviction.
Take Eddie again. If his restaurant is underperforming, he’s not going to walk away the moment he’s down $50K. He’ll analyze the business. Maybe he tweaks the menu. Maybe he sources cheaper ingredients, or boosts his marketing budget to attract a different crowd.
Only after he’s tried everything, and genuinely stopped believing he can turn it around, should he close the doors. Not when his restaurant happens to hit some arbitrary ‘stop-loss.’
The same logic applies to your investment portfolio.
When you’re an investor, you’re a business owner — not a speculator.
“Cut your losses and let your profits run”
This widely used expression is beyond flawed!
It assumes we know the future.
It implies that if you don’t cut your losses, they will only increase. But here’s the thing: no one can predict the future.
I’m sure we can all relate to being in a situation where you cut your losses, only for the stock to turn around… and if you had stayed the course, you would have made a profit.
As Peter Lynch famously said, more money has been lost by investors trying to avoid losses than by the losses themselves.
I can tell you from my own experience: the majority of my stock and crypto positions had steep declines before becoming profitable.
A stop-loss doesn’t just cause financial loss, it also keeps you out of investments with high ROI potential, cutting off your profits before they ever have a chance to grow.
Most good investments come with some volatility. And volatility is the price of performance.
Stop-losses will almost always be triggered by that volatility, kicking you out of the trade.
I teach these investment strategies — and many more — inside my Henrique Wealth Academy. Check it out for free.
Alternatives to stop-losses
So if stop-losses aren’t the answer, what is?
Here are the best alternatives when it comes to protecting your investments:
Build your own investment thesis, so you invest with conviction
Commit to long-term investing
Add uncorrelated assets to your portfolio to reduce overall risk
Use the right position sizing (I wrote a full article on this: The Math Behind Position Sizing: How Much Should You Really Invest Per Trade?)
I’ll break each of these down later in the article.
A real example: my Meta trade
Have a look at the graph below. The smiley emojis at the bottom of the chart are buy orders I placed on Meta stock.
Meta dropped by 77% in 2022. Now imagine that instead of buying more, I’d sold because the stock hit my stop-loss. In that case, I’d have missed the 800% run-up that followed!
In the short term, markets can make random moves. But in the long term, they always reveal a stock’s true value.
I decided to buy Meta at $160 because I was convinced the stock was undervalued. Right after I bought, the price plummeted another 50%.
If I had had a stop-loss in place, I would have been kicked out of the trade and, without a doubt, would have locked in a major loss.
Instead, I doubled down on the investment. If I believed Meta was attractive at $160, at $100 it was even more attractive.
Over time, Meta’s stock recovered. Today it’s trading at $610, giving me over 300% in profit!
In investing, the slow bleed is hard to notice
The average human body holds around 5 liters of blood. Sometimes, it’s not the deep cut that causes the most damage. Losing 2 liters at once is fatal, but 200 tiny cuts, each slowly bleeding 10ml unnoticed, would kill you just the same.
Stop-losses are these small cuts. They slowly but surely drain the profitability out of your portfolio, eventually flatlining it altogether. This is the reason why 97% of traders lose money in the long run.
As I mentioned earlier, the majority of my crypto and stock positions had drawdowns of 10%, 20%, 30%, 40%, and sometimes even more — before recovering and turning profitable. Stop-losses would have bled my portfolio dry.
3 things you can do instead of using stop-losses
1. Position sizing
Take gambling as an example. I’ve visited a casino from time to time to try my luck, but I hate losing, so I only bet small amounts, say, $20.
I don’t go all in with $2,000 and set a stop-loss at -1% below entry. That’s not how it works. I only put on the table what I am willing, or can afford to lose.
Although investing in the stock market and crypto isn’t gambling, but I am sure you get my point!
To minimise the risk of losing more than 5% of my capital, I never invest more than that amount in any single new investment. This simple rule of thumb protects me from outsized losses without capping my upside.
There’s some powerful math that can help you with position sizing, from the investor’s Kelly, the trader’s Kelly, and the risk of ruin. You can read more about all these wonderful methods here in this article.
2. Diversify to “stop losses”
Never put all your eggs in the same basket. Both my stock portfolios have over 30 stocks, and I also own some bonds and ETFs.
Some are winners. Some are losers. I’m OK with that, because the winners far outpace the losers.
Here’s where it gets interesting: my stock portfolio has outperformed the S&P 500 significantly over the last few years, all without a single stop-loss in place.
And no — not having stop-losses doesn’t keep me up at night! I have a strong investment thesis for every position I hold. I’m diversified. And I keep cash on the side plus leverage capacity to buy, in case the market crashes.
3. Place a buy order, where you’d otherwise place a stop-loss
Did you know that institutional investors place their buy orders exactly where retail investors place their stop-losses?
It’s called stop-loss hunting. Big institutions bleed retail investors dry by placing buy orders right where the retail crowd puts their stop-loss orders.
Check out this video:
Do the same, and you’ll be buying at a level where most other people are panic-selling.
Move away from the flock of sheep that will continue using stop-losses, and graze in a different pasture entirely. That is where you can take advantage by buying at those prices that scare everyone else out of the trade.
Here’s the practical step:
Determine where you would normally place a stop-loss. If that’s 15% below the current price, or at a specific price level — place a buy order (or buy manually) at exactly that level instead.
Don’t fall into the trap
Big whales and institutions can literally see clusters of retail stop-losses. They deliberately smash the price down to trigger them, scoop up the shares at a discount, and watch the asset rebound.
It’s legal market manipulation dressed up as “normal trading.”
You sell in panic at a loss so they can buy cheap and profit.
Do you want to stay a sheep forever, or become the predator?
The idea that stop-losses protect you is a myth.
Forget that comforting myth.
Instead, write a proper investment thesis before investing, size your positions properly, diversify, and buy when others are panic-selling.
That’s it.
Stop losses are for gamblers scared of every dip. True investors don’t need them.
These are just a few of the strategies I teach inside my Henrique Wealth Academy. Come check it out — for free.
— Henrique Centieiro 🕺🏻
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