When is it time to sell a stock 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 different scenarios that should trigger a sell signal for a stock or mutual fund:
A specific percentage drop in value
Investment program signals
These situation (and others) might sound straightforward, but all too often we let our emotions or our search for the best answers confuse us or cloud our judgment with doubt.
Specific Percentage Drop – A number of authors suggest setting a trailing stop at 7% or 8% so that if our stock goes up and then starts back down, you automatically sell if it drops a specific percentage 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 Drops 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 something from your watch list – a list of stocks or funds that you are interested in but haven’t bought because your money is already fully invested.
Chart Signals – Again, you can get good 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 symbol in-between a buy and sell point and these could be construed to mean either a buy or a sell.
Perhaps the most challenging aspects or using charts revolves around two factors:
- Which charts to use? Some chart programs offer 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 charts say to buy, some charts say to hold, and some charts may even say sell – and all for the same stock or fund 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 others because you’ll just set yourself up for confusion…which leads to doubts…which leads to failing to action…which invariably leads to losing money.
- What setting to use? Most chart programs come with default settings. But who says these are the best for you? Chart settings can be based on some long-ago investor’s philosophy which was based on his risk level and how long he wanted to hold a position and most definitely not your level of risk or how long you want to hold a position. Your settings should be based on your personal 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 a few questions of your goals and your investment time limitation, but this is a good thing because then your chart settings will fit you.
Investment Program Signal – Most investment software 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 preset signals. The challenge comes when we want to see if (yes, IF) there is something else that would get better results – in other works, IF you changed the preset parameters would you 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 investment software program offers a verification method to confirm the recommendations, just looking around for another recommendation invalidates your investment program process and puts you back into the realm of emotional decision-making.
Ultimately, the best answer for when should you sell or hold an ETF or mutual fund, or stock is to follow a specific sell/hold philosophy that you can accept and stick with it at all times.
Dominick is the designer of the investment program Dynamic Investor Pro, an investment software used by individual investors and professional investment advisors for stocks, ETFs or mutual funds.