Recently, I had an email exchange with a reader, who misunderstood the exact recommended sell stop figures and used 7.5% for broadly diversified equity mutual funds/ETFs and a range of 10-12% for sector and country ETFs.
There is nothing wrong with using a sell stop percentage that you are comfortable with, such as 7.5%. I know of advisory firms that use 8% straight across the board. All of these different percentages will do the intended job for you, which is to limit losses or to lock in profits once the trend comes to an end.
However, I want to caution against using a range, such as this reader did when applying his 10-12% rule. The reason is that it can lead to wishy-washy decision making.
Here’s what I mean. Say, an ETF has come off its high by -10%, so you decide to hang on and watch it a while longer. It then drops to -11% and you continue holding on; subsequently it slides to -12.5% and you decide to wait a little longer since this number is still fairly close to your maximum of -12%.
You can see where I am going with this. It’s very easy at this point to let emotions control your decision making process and, all of a sudden, you’re down to -14% and still have not sold.
Use a fixed number to determine your exit point, and not a range, which will help you avoid getting stuck with this kind of slippage.
Again, I give myself a little leeway once a sell stop has been triggered. For example, if my intended exit point was set at -7%, and my position closes at -7.15% or so, I will wait a day (sometimes two) to see if the market rebounds before pulling the trigger.
On the other hand, if market activity pushes my holding straight to -8% at the close, I will the sell the next day—no questions asked.
Again, this is not an exact science, but I believe that sticking to a firm number as discussed, will make it easier for you to execute any exit strategy as opposed to being stuck in a range.