Knowing when to hang on to your exchange traded funds (ETFs) and when to let them go is one of the hardest things for an investor to do.
This is why it’s so imperative to have a sell strategy in place, and even more important, to stick to it when the time comes. Ulli the Wall Street Bully talks about the issue of sell points in a recent post.
If your stop loss is too low, for example, at 3%, you’re going to be buying and selling more frequently, racking up fees in the process. Ultimately, that eats up your returns. You also won’t be able to fully take advantage of trends. Instead, you’ll be dealing with constant short-lived whip-saws. Sometimes there are volatile days in the middle of an overall uptrend, and it’s in your best interest to ride those out.
On the other hand, having a sell point that’s too high can also hurt you. Setting your sell point at 30% could mean that you lose a significant portion of money before you’re out. It also has you sitting in areas that might not be performing so well and missing out on areas that are trending up.
For our own strategy, we use an 8% stop loss. That is, when a fund drops below its 200-day moving average or 8% off its recent high, we sell it. And when a fund begins to show an uptrend by crossing above its average, we’ll get in.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.