Discussing the sell stop strategy has been the hot topic over the past few weeks and for good reasons. It’s one of the most important aspects of keeping your portfolio intact when the trend reverses.
There is not just one way to use sell stops as reader SS commented:
I disagree to an extent. If you have a diversified equity mutual fund portfolio, there is no reason why you can’t just have a trailing stop on the entire portfolio.
It’s easy to track which funds are doing well vs their category and which classes are doing well overall. If one is really underperforming you can just swap it for something that’s better. It really depends on your philosophy.
You can use the S&P; as you gauge if you’d like. The S&P; high is 1072 ytd…if you use 10% of that high, or whatever becomes the high, as your trigger to exit…. you know at what point there are probably some fundamental issues in the economy and you should likely get out. The caution is be careful about setting a trigger too low. The market could drop off 6-7% and still be fundamentally sound. And you don’t want to be in and out of the market needlessly. The best thing is this alternative is much less labor intensive than tracking every fund.. for both clients and advisors:)
To each his own. Using the S&P; as a gauge for setting sell stops can be a dangerous game. Why? For the simple reason that it may drop at a slower pace than your portfolio, which, as a consequence, may lose more than your intended percentage.
Again, there are many ways to work with sell stops. You need to find the one approach that you are most comfortable with. Looking at the big picture, any type of sell stop will be better for your financial health than none at all.
Comments 5
Sell stops are not one-size-fits-all. And you have to know the "underlying". They have to be outside the normal trading volatility range of that underlying(s).
Otherwise, you will have sellers remorse (selling too soon or being out of the market).
Ulli,
I find that rather than use the S&P; 500 (SPX) as a benchmark to represent all ones holdings like this person just mentioned that I have a different approach. The symbol FUNDX is a fund of funds made up of many different managed mutual funds and ETFs and then upgraded periodically. Using this fund symbol FUNDX is a good indicator and when it goes down enough to turn the 200 day sma line (not price line) on a chart down then it is time to exit. Check it out.
Ulli,
Something that you definely are missing when talking about trailing stops is the Market trend. If the Market indicators are Bullish, one really should think twice about selling an ETF / Mutual fund on a 7 percent down turn. Had I not used common sense and not sold my ETF's / Mutual funds on a 7 percent down turn, I would have missed out on the 50 percent bull Market run over the last 7 months. I believe you have also advocated using common sense / intuition before selling mutual funds / ETF's.
My advice, to your reader is to find a Market timer news letter they trust, and follow it. In addition, stay clear of any hedging "The Simple Hedge" while in a bull Market. Unless you are a clairvoyant or someone looking for sub par returns, hedging when all indicators are positive is down right foolish!
Finally, my advice to everyone is look at your asset allocation, and make sure your BETA, and ALFA numbers are within you personal risk tolerance. If you don't know what these number are, Google them or hire an Investment Advisor like Ulli, because in the long run you will get burned!
Ulli,
Regarding all the talk about using stops and market letters etc. I believe the person was correct when they said buy a good market timing letter and a good one with a long history is http://www.timingcube.com and they work very well using RYOCX long and RYAIX during short signals, they also issue Cash signals during those times of flat markets. Check them out. The annualized compounded annual rate of return over the past 9 years or so using the two funds just mentioned is slightly more than 25% per year. Not bad with not many trades per year and it is very simple to implement.
George,
Over the years, I have heard negative comments from readers as well about TimingCube. They felt it was not worthwhile, but I can't attest to that. I like to hear from those investors who have actually used them.
Ulli…