"It instructs the team to sell when losses become sizable, regardless of what its mathematical models say, according to a person with direct knowledge of the matter."
If I remember this correctly, research indicates that if the portfolio is being driven by a random walk process, a stop-loss always causes a reduction in returns (negative stopping premium), i.e., stop-losses are useful only if the return generating process can be shown to not be a random walk.
Also, they tend to mess with your mind (loss-aversion psychology, deep feeling of pain at losses) and make you exit and enter the trade multiple times, adding up to transaction costs, too.
All in all, a) Buy and Hold may actually be quite sensible and b) stop-losses are actually much more complicated than you'd think and seem to be a mathematical rabbit hole.
Stop-losses may make sense in, say, an intraday pair-trading strategy where an analysis of past return evolution clearly shows that winners keep winning and losers are hopeless beyond a point.
Exactly. Unless you can show that the price continues to move against your losing positions by more than their cost to liquidate, you shouldn't do it. Your screw-up was putting the bad trade on in the first place.
I'm especially surprised it's used in a model like this. Most quant funds use some type of portfolio risk management to allocate capital toward bets that with the highest expected return while controlling overall risk. That losing stock may be offsetting other risks in the portfolio.
As I mentioned in my other comment, a stop-loss is a very crude approach to risk management. It will help control the middle of your left tail, but the far left tail extreme events cannot be protected against by such a rule.
One. VCs structure their deals so that one breakout success is enough to return the fund. The smart ones never rely on lightning striking more than once.
Actually, Vanguard just strongly suggests that their customers do so (and provide nudges in the form of limiting sales and exchanges from certain funds to once per month). They don't get to make their customers follow a Buy and Hold strategy (and their ETF products have no restrictions), so I think it's more accurate to say that they do better (for their customers) due to their relentless push towards efficiency, with low turnover being an important part.
I feel like that's splitting hairs a bit. Sure, they can't prevent you from panic-selling or attempting to time the market, but their low expense ratios are possible because they, themselves don't do it. They just follow along with the markets.
I disagree. Since so much of their business is in their passive index funds, they/the fund managers, don't get to choose. Instead, they do their best to encourage and incent a set of customers towards low turnover.
They do a great job with VTI and their other funds to attempt to minimize the requirement of actually selling assets when liquidation requests come in, but that's not the same as saying that they, Vanguard (and more accurately the fund managers), practice a "Buy and Hold" strategy. Tracking an index well actually requires lots of buying and selling!
There's a distinction to be made between permanent losses and market driven / unbooked losses. If the original investment thesis stands, ignoring day to day market changes is perfectly reasonable.
Hard to blame the robots then.