Buying, picking a stock, ETF or mutual fund to purchase is often considered the hard part of investing, but selling and knowing when and why to sell can be far more difficult. Selling can be hard, particularly if you become emotionally attached to your holdings.
Removing your emotions from the decision making process can be like switching from buying a Chevy after having had six, to Ford’s; not easy! But if you follow set selling rules you will maximize your profits and minimize any investment losses.
The key to unemotional selling is to have rules or parameters that when met “require’ you to sell your investment. Such rules include (but are not limited to):
• Decline – if the stock goes down a certain percent or a certain dollar amount. Percentage drops from a high point after you made the purchase are called “trailing” or “high” stops.
• Drop in Rank – if the ETF is part of a group and after owning it a while it is no longer ranked at the top by your means of analysis but is now below a certain level.
• Chart Signal – if you look at different charts for your mutual fund and the signal based on your chart of choice is a sell signal.
• General Exit Signal – if you have a chart or calculation that analyzes the strength of the markets and this “Benchmark” gives an exit the market signal.
• Rebalance – you automatically sell at certain times of the year or after a certain number of months so you then buy the most current best performers.
The challenge with “sell rules” is how to define them. In his books, William O’Neil generally recommends selling if a symbol drops 7 – 8% while some software programs can actually test your group of stocks (or ETFS or funds) to find what is the best trailing stop to use for the particular group.
The same goes for where a symbol ranks in your group. One author suggests that an investment position should be kept as long as it’s in the top 10% of the group. Again, some software programs can evaluate where the rank cutoff should be based upon the particular group.
Reading and understanding charts can be a whole separate article. There are many software programs both for sale and free on the internet that provide dozens of charts. The two questions are: a) how do you set the chart parameters or should you just stick with what the providers give you? and b) which charts should you use?
Whether or not to use a Benchmark Exit Signal or to rebalance your portfolio at specific times is more of a philosophical question involving your particular trading goals and methods. There are definite arguments for using and not using both of these items.
The important, critical factor, however, is picking and implementing strong sell rules. With strong sell rules you will lock in profits and minimize losses.