A Different Sell Stop

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.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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