When is it time to sell or switch positions? This is a very common question that I get from many investors, yet too many of us ignore the answers. If you are trying to invest safely, build profits, and/or enhance the value of your retirement account or regular wealth account it is important to know when to sell, when to hold, and how to keep from getting confused by other signals or events.
There are a number of scenarios that should trigger sell signals for a stock, or mutual fund:
A specific percentage drop in value
Investment program signal
These scenarios (and others) might sound straightforward, but all too often we let our emotions or our search for the best answer confuse us or even cloud your judgment with doubt.
Specific Percentage Drop – A number of authors suggest setting a trailing stop at 7% or 8% so that if your stock goes up and then starts back down, you automatically sell if it drops a specific percentage (7% or 8%) from its highest value. This sounds simple and precise, but what about when the entire market cascades down for one, two, or even three days only to suddenly bounce back up?
If selling based solely on Specific Percentage Drop is your philosophy then you really need to bite the bullet and sell. But note: If the market does rebound, or even before it starts climbing back up, you should buy something from your watch list – a list of stocks or funds that you are interested in but haven’t bought because your money was already fully invested.
Chart Signals – You can get good sell signals from charts if you understand how to read them. Some charts give pretty straightforward buy/sell signals, but there are others that may show a symbols is in between a buy and sell point and these could be construed to mean either a buy or sell signal.
Perhaps the most challenging aspects of using charts revolve around two factors:
- Which charts to use? Some chart programs offer over a hundred varieties of charts. If you look at more than two or three charts you can end up spending hours or even days studying the charts only to discover that some say buy, some say hold, and some may even say sell – and 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 to use, and then don’t look at the other charts because you’ll just set yourself up for confusion…which leads to doubt…which leads to failing to take 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 charts for you? Chart setting can be based on some long-ago investor’s philosophy which was usually based on his risk level and how long he personally wanted to hold a position. Your settings should be based on your personal level of risk and how often you prefer to trade, in other words the signals should help you achieve your goals – not those of someone else. This may involve asking a few questions, but that is a good thing because then your chart settings will fit you.
Investment Program Signal – Most investment programs give precise buy/sell signals. Some programs allow you to set the parameters or rules for buying and selling. This makes it easy if you stick with the program and the buy/sell signals. The challenge comes when we want to see if (yes, IF) there is something else that would get better results by changing the parameters…if I changed this would I get a higher return?
The key to using an investment program is to follow or develop strategies that were back-tested and to stick with them. Looking at alternatives within the program negates the strategy, your back-testing, and the optimized strategy. Unless your investment software 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 should you see” is to follow a specific sell/hold philosophy that you can accept and stick with it at all times.
Raymond M.F. Dominick is the author of “Invest Safely and Profitably” (Your Success Guide), available from Amazon.
- Ultimately, the best answer for “when should you sell” is to follow a specific sell/hold philosophy that you can accept and stick with at all times.
- Investment Program Signal – Most investment programs give precise buy/sell signals. Some programs allow you to set the parameters or rules for buying and selling. This makes it easy if you stick with the program and the buy/sell signals. The challenge comes when we want to see if (yes, IF) there is something else that would get better results by changing the parameters…if I changed this would I get a higher return?