Are stop-losses for wimps?

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?

Many people will be very passionate about this topic, but 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.