How do you decide when to sell?

Once you’ve invested in a particular sector, by buying a particular fund, you have a different question to deal with: How do you decide when to sell?

With the Saltydog system we have different guidelines for when you’re buying and when you’re selling.

When you’re buying, you’re looking to identify the best fund, in the best sector, in the best group.

Then, when you own a particular fund, you have to decide what to do with it. Of course if it keeps performing well, you hold on to it or even invest more money in it.

But what if things aren’t going so well?

Essentially we want to see a fund in the top half of decile performance i.e. in deciles 1-5. If it starts dropping off, we give it three weeks’ grace. Although we are active investors, we don’t want to be buying and selling literally all the time. We give it the benefit of the doubt for three weeks.

So we will keep hold of a fund, even if it’s decile ranking is dropping, for a few weeks. But if we see that it’s dropped out of the top half of the decile rankings for three weeks in a row – i.e. its decile ranking is 6 or worse – then we will sell it.

If you’re feeling more cautious, you could be more pro-active than this. For example, if a fund has been in decile 6 or lower for two weeks, you could halve your allocation to it. And then if it stays in decile 6 or lower for the third week, then you would sell completely. So you can either do things more gradually, or simply wait until you see three bad weeks in a row (decile 6 or lower) and then sell all at once.

Another situation to consider is where the fund you hold is doing fine, but another fund overtakes it. What do we do here?

The answer is that we’ll tend to keep the fund we already hold over the short term i.e. 4 weeks or so. But if we see that the other fund is out-performing over a longer period
– i.e. 6-8 weeks – then we will replace the one we own with the better-performing one.

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