The SimpleAllocations plans assume you have placed a sell stop order at 10% below the purchase price for any security (ETF/Mutual Fund). Further, the SimpleAllocation system uses a "tracking stop loss, dividend adjusted"; the stop loss is always 10% below the highest closing price since buying the security. This stop is adjusted for dividends.
When a security pays a dividend, the price will drop. See the example data below for PRRSX. A dividend was paid on 12/26/2012, resulting in an offsetting price adjustment. That is the reason that many stock price history databases include an "Adjusted Close"; this value is adjusted for the value of dividends paid. Our stop losses work on adjusted close data, not actual close data. Because of this, to exactly track the model, you cannot use stop orders.
Date Open Close Volume Adj Close
12/28/12 4.89 4.89 0 4.89
12/27/12 4.92 4.92 0 4.92
12/26/12 5.26 5.26 0 4.9 Dividend paid
12/24/12 5.28 5.28 0 4.92
12/21/12 5.27 5.27 0 4.91
401K plans generally do not let you place sell stop orders, so you will have to monitor your account and place orders to sell/rebalance as appropriate in order to match the results predicted/tracked by SimpleAllocation plans.
Although this is not simple, placing these stops is not nearly as complicated or time consuming as you might think. The reason is that a 10% stop loss requires a large move in the markets as a whole. For the ETF Group 001, there were approximately 32 stops hit in the 10 years from 2002-2012, but most of those were in the large declines during 2008 and 2009. So it would be reasonable to not adjust your stops each day during relatively stable periods; but then keep a close eye on the stops during periods of high volatility. (For a complete history of all stops hit during the period modeled, see http://www.simpleallocation.com/allocation-plans/stop-loss-history)
You also need to decide if you would rather place actual stop orders, or watch your securities and place market orders when the security hits the stop based on adjusted closing price. Stop orders are easier to manage, but are also subject to sale due to extraordinary circumstances like the 2010 "flash crash" (http://en.wikipedia.org/wiki/2010_Flash_Crash), as well as being prone to trigger incorrectly due to a large dividend. Consider your options and do what is best for you.
If you do sell due to a stop loss being hit, the model assumes you wait until the next allocation cycle to reinvest.
We are now Tweeting when a security hits its stop; but this will be after market close and based on end-of-day data. These are NOT realtime alerts. Please do not use our Tweets as a substitute for stop orders. Further, delays in, or corrections to, end-of-day data or other technical problems could result in significant delays.
For more on sell stop orders, see: http://www.sec.gov/answers/stopord.htm