When is it time to sell or switch positions? This is a common question, yet too many of us ignore the answers.
If you are trying to invest safely and build profits, enhance the value of your retirement account or regular wealth account it is important to know when to sell and when to hold and not be confused by other signals or events.
There are a number of different scenarios that should trigger a ‘sell’ of a stock or mutual fund:
- Specific percentage drop in value
- Chart signals
- Investment program signal
These all, and others, may sound straight forward but too often we let either emotions or our “search for the best answer” either confuses us or leads us into a land of doubt.
For example:
Specific Percentage Drop – a number of authors suggest setting a trailing stop at 7% or 8% so if your stock goes up and then starts down you automatically sell it if it drops this specific percent from its highest value. This sounds simple and precise. But what about those days that occur every so often during the year when the entire market cascades down for one or even three days only to bounce back up?
If selling based solely on Specific Percentage Drop is your philosophy then you really need to bite the bullet and sell. If the market does rebound, or even before it starts climbing back up, you should buy what is on your watch list – a list of stocks or funds that you are interested in but can’t buy because your money is already fully invested.
Chart Signals – you can get good signals from charts if you understand how to read them. Some charts give pretty straight forward buy-sell signals while others can show a ticker in between a buy and sell point which can be leading to either the buy or sell indication.
But perhaps the most challenging aspect of using charts revolves around two factors:
- Which charts to use? Some chart program offer over a hundred varieties. If you look at more than two or three charts you can end up spending hours or even all day studying the charts only to discover that some say ‘buy’, some say ‘hold’ and some may even say ‘sell’ – all for the same stock on the same day. My answer to this dilemma is to pick and concentrate on just two or three charts and don’t look at others because you then set yourself up for confusion which leads to doubt which leads to not taking action which invariably leads to losing money.
- What settings to use? Most chart programs come with default settings. But who says these are the best? Chart settings can be based on some long-ago investor’s philosophy which is usually based on his risk level and how long he generally wanted to hold a position. Your settings should be based on your level of risk and how often you prefer to trade so the signals help you achieve your goals – not those of someone else. This may involve asking questions, but that is a good thing because then your chart settings will fit you.
Investment Program Signal – most investment software gives precise buy-sell signals. Some programs allow you to set the parameters, rules, for buying and selling. This makes it easy if you stick with the program and the signals. The challenge comes when we want to see “IF”, yes, “IF” there is something else, “IF” we changed the parameters would we get better results?
The key to using an investment program is to follow or develop strategies that can be back-tested and then to stick with them. Looking at alternatives within the program negates the strategy, your back-testing and the optimized strategy. Unless your program offers a verification method to confirm the recommendations, just looking around for another recommendation invalidates your entire investment program process and puts you back into the realm of emotional decision making.
Ultimately the best answer for when to sell or hold an ETF or mutual fund is to follow a specific sell-hold philosophy that you accept and stick with at all times.