Reader Q + A: Exit Strategy

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Reader Bill had this question regarding our sell strategy:

I have my IRA diversified among seven T. Rowe Price funds. Do I apply an exit strategy to each separate fund—or use one fund (i.e: Equity Income)?

Where do you suggest I put the money from the exit strategy in this environment?

Yes, you will have to track the trailing sell stop points for each fund separately, since they obviously fluctuate to different degrees. Some may hold up better than others so each needs to be followed based on its own merit.

While the markets have pulled back recently, no sell stops have been triggered yet. However, if that should occur, I always move to the safety of the money market funds first.

That allows me to observe market behavior unemotionally and evaluate if this was simply a whip-saw or an actual trend reversal. At the same time, I will consult the weekly StatSheet to see if any other area is moving to the upside.

Chances are there will be hardly any, since all world markets are so intertwined that they pretty much move in tandem but to varying degrees.

If the markets head further south, I’m glad I’m out; if they reverse and head up again, I may re-enter using some of my previously held positions (or new ones) once the old highs have been taken out. That confirms to me that the trend is back on track and warrants exposure again.

Keep in mind that this is not an exact science, but merely a focused effort to keep out of harms way should the markets head south again in a big way a la 2008.

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Comments 1

  1. 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 neddlessly. The best thing is this alternative is much less labor intensive than tracking every fund.. for both clients and advisors:)

    CC, Cincy, OH

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