Here’s a reader question that comes up on a regular basis:
As an employee of the xx company, I manage my Federal Thrift Savings Plan. If I get stopped out, what rules should I use to re-enter the market? I know you must get this question a couple of times a week but I couldn’t find the answer in your past postings.
Re-entering after having experienced a whipsaw signal is always a challenging task. There are no hard and fast rules and much depends on the individual’s risk tolerance. I can suggest several scenarios for you.
Let’s assume the high price a fund has reached, since you bought it, is $10, and the market starts to decline. If you apply the 7% sell stop rule (for domestic and international funds/ETFs), you should be pulling the trigger once the fund breaks through a price point, on a closing basis, of 9.30 or thereabouts.
You now have 3 options:
1. You can replace this fund with another one that is currently in an uptrend
2. If you are conservative, you can repurchase this fund once it takes out its old high of $10. That presumably would tell you that the uptrend has resumed, but, depending on market activity, it can be a long way back to reach that point.
3. If you are more aggressive and want to re-enter sooner, pick a price that is 2% above the 9.30 level you got stopped out of. That will get you in the market sooner, but it also can set you up for another whipsaw if this trend reversal does not hold.
As I said, there is no perfect way, and you can use any other percentage that you are more comfortable with. The only thing I recommend is that, once you have decided on that re-entry number be consistent with it.