When Should You Sell a Fund?
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Top Ten Mutual Funds, 1998 to 2003 (Click to Enlarge)
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Everything drops in Bear Markets. In 2000, dot-com bust affected
the whole economy, killing earnings and kicking off a 32-month
down-trend. Recovery of the S&P took seven years. Anyone holding
equities had to sell to avoid as much as an 80% loss.
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Knowing When to Sell. Click to Enlarge)
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The chart shows some of the tools we use to make a sell decision:
trendlines, support & resistance levels, and lower-low and
higher-high failures. These guideposts got us out well before the
fund plunged. Details are in My book, The X-Discipline, Chapter 15.
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Many financial planners and brokers pitch long-term
investing this way: "Buy and hold a diversified mix of
funds calculated to limit risk and exceed market
returns. Annually, “re-balance” your portfolio by
buying more losing positions and selling winners,
because they will reverse direction as they “return to
the mean.”
In a sharp correction, as in the fourth quarter of 2008
or long bear market (remember 2000-2003?),
everything falls. Diversification doesn't work. People
who have held on take huge losses, then panic, toss out
their plan, and sell anyway.
The other problem with "buy and hold" is that you
need at least 10 years to make up for any large losses.
If you are over 50, you don't have time to get it back.
Selling is a critical strategy for preserving capital.
The ETF-Discipline uses a simple rule: buy funds that
are trending up, hold when trending sideways, and sell
when trending down. You plan when to sell before you
buy. You measure trends precisely and consider
volatility, news events, sentiment, and market
direction to make rational decisions.
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