I've just asked you to be the boss of your investments. Now I'm going to ask you to do something even harder: Be the boss of you. To successfully use a sell strategy, you must be disciplined enough to execute it. It's not easy.
If we surveyed 1,000 people and asked them, “What are the two things you need to do to lose weight?” every one of them would probably answer, “Exercise regularly and eat a healthy diet.” The answer is very simple, but it's not easy. If it were easy, no one would be obese.
Your sell strategy is very simple, too. When you hit your trigger point, you sell.* You can't equivocate and think, “Well, this might resolve itself” or “It looks like the trend might change.” If you second guess your plan or overanalyze the trend, you can get into trouble. By relying on emotions or trying to foresee the future, you may wait too long to act and lose a lot of money in the process. A sell strategy requires you to be dispassionate, and to act even when there is cognitive dissonance.
Economist Robert Shiller famously called the years from 1995 to 2000 a period of “irrational exuberance.” Turned out he was right, but in my opinion, it didn't matter. I don't care why the market goes up. As long as the market is rising, I want to be in it. I don't care if it is rising for irrational reasons, because it's making me money. I'm not going to fight it. On the other hand, if the market is going down, I want to be out of it.* I don't care what analysts say about the reason behind the drop. What's important is that I'm losing money. I don't care why.
It doesn't matter if you feel good or bad about the market. Once you hit your trigger point, it doesn't matter why you're selling.† You just do it.
It's not just emotions that can keep you from executing a sell strategy. Just plain life can cause you to neglect your strategy. It's too easy to make excuses: “I had that big meeting today” or “Market conditions are different this time” or even simply “It can wait.”
You may not even be available to implement the strategy. What happens if you hear that the market is dropping like a stone when you're on a cruise and your tour of the pyramids is leaving in 10 minutes? You'll have to decide between finding a secure computer so you can execute the sell or climbing the pyramids. You'll probably climb the pyramids.
Inattentiveness is not a good strategy.
You have to have the discipline to act quickly, especially with the selling strategies described earlier in this book. If the market has reached your sell point you have to sell. You cannot delay. You cannot hem and haw. You cannot give it a little more time and see what happens. You have to act.
I'm not alone in warning you. In Stocks for the Long Run, at the end of the “Technical Analysis and Investing with the Trend” chapter, Jeremy Siegel said, “A final word: Technical analysis requires the full-time attention of the investor. In October 16, 1987, the Dow fell below its 200-day moving average at the very end of trading on the Friday before the crash. But if you failed to sell your stocks by that afternoon, you would have been swept downward by the 22 percent nightmare of Black Monday.”
Not only does a sell plan require your full-time attention, your portfolio must be organized in such a way that you can take action quickly. You have to ask yourself, “If I had a sell strategy, could I actually implement it? If the market hit my sell point at the close of business today, could I sell everything tomorrow?”
For most of you, the answer is “no.” You have a lot of moving parts to your portfolios. You have many different investments. You have accounts scattered here and there. You would have to go to seven different websites with five different investments in each account in order to sell all your investments. Your portfolio probably looks like a giant bowl of spaghetti.
Adopting the “buy, hold, and sell” way of investing can't be just a philosophical exercise. You have to reorganize your investments so that you can sell everything when the time comes. At Money Matters, that's the first thing we do with our clients. We properly diversify each portfolio to match the client's individual risk profile, and make sure we can sell the investments when the time comes. By cleaning up their portfolios, we get ready for the inevitable bear markets. We prepare to take action, unencumbered by a portfolio full of investments that could keep us from selling quickly.
Reorganizing and consolidating your portfolio will require some work on your part. If you believe you don't have the discipline or the organizational skills, don't use a sell strategy. You'll just prove the buy-hold argument right. The investors who wait too long to get out of the market and are slow to get back in don't make much money, and can lose a lot, just like the buy-holders claim.
A sell strategy can work, but the application of that strategy is as important (if not moreso) than the actual plan. Learn a lesson from the New Orleans tragedy. There were plenty of emergency response plans in place, but when Katrina hit, those plans were not executed properly.
The beauty of having a mathematical, fact-based sell strategy is that it gives you quantifiable data. Once you have that data, you can act on it. But here's the rub: You must act.