This is our fourth and final post in a series of posts where we're looking in detail at timing your fund investments. In our last three posts we discussed the importance of recognising chart patterns when timing buys. In this post we'll go on to look at when to sell a fund.
If you would like to know more, please just download our free report Fund Timing: When to Buy and When to Exit.
When to sell a fund
What is the best way to determine whether you should keep hold of a fund? What signals or signs should you look out for, telling you that all is okay or whether something is wrong? The amateur way is to go by how you feel. We prefer to base our decision on three things: market direction, recent fund performance and the fund chart pattern.
1) Market direction
Knowing if the market is healthy is an extremely useful tool because if the market is in a bull phase, three out of four funds will move up, meaning it’s a good time to be fully invested.
However, if the market is in a bear phase, three out of four funds are going to move down, which means it’s not a good time to be invested in equity based funds. This tells you that when you have fully developed the skill of reading market direction, you’ll be able to focus on investing in quality funds during bull markets and raising cash in bear markets.
2) Recent fund performance
We keep a close eye on how the funds we own are acting on a daily basis and we are constantly measuring to see how our fund is performing versus the market. Ideally, when the indexes rise, our fund will outperform the general market for the day and when the market falls, it will outperform on the downside too.
However, in reality this rarely happens so you have to look at the fund’s weekly performance versus the market, its fortnightly performance and its monthly performance too. But don’t stop there – also look at its 3 month, 6 month and 12 month performance. We always pay particular attention to how our funds behave when the indexes are rallying and ideally, they’ll be making a greater return than the general market.
In a perfect world, the fund should be beating the market and if it isn’t, a red flag should be raised. If it is doing better than the market, it tells you that it’s probably best to hold onto it but if it isn’t, and its underperformance is over a significant period of time such as 3–12 months, it usually means that it’s time to sell.
Another thing that we do which is worth sharing is watch how the stocks the fund owns are performing on a daily basis. We do this by setting up watchlists on MarketSmith, which is a paid for subscription and Yahoo! Finance, which is free.
Each day we look at how the stocks the fund owns are behaving and if they are beating the market, it tells us all is well, which gives us the green light to stay invested. However, if we see the stocks constantly underperforming, it tells us that it might be time to ditch the fund.
3) Chart pattern
Periodically, we like to check the fund’s chart pattern. Why? We want to make sure it’s acting right and ideally beating the market. For example, if the market is correcting, the fund might instead be moving sideways rather than carving out a big bowl shape – that’s a sign of strength. On the flip side, if the market is advancing and we see that the chart of our fund shows it’s been shuffling sideways, that’s a sign that it might be time to exit.
It’s also good to be aware of certain bearish chart patterns that funds carve out prior to them breaking down, such as climax tops and head and shoulder patterns. A climax top occurs when a fund rises very quickly and gets overextended. During a climax top, funds can make enormous gains in a very short period of time (usually less than two weeks). As an investor you certainly don't want to be one of the last passengers on the train and get quickly thrown off.
The head and shoulders pattern is generally regarded as a reversal pattern and it is most often seen in uptrends. We recommend you Google the term ‘climax top’ and ‘head and shoulder pattern’ to discover lots of examples of what these two bearish chart patterns look like.
Always know what stocks your fund owns and monitor those stocks closely. Are the stocks the fund owns breaking down? Is the fund as a whole underperforming the market? Ask yourself the question, would I buy this fund right now? If you wouldn’t, get rid of it. Never fall in love with a fund and if it’s been underperforming for some time, exit it and don’t look back.
Selling an underperforming weak fund you own can be tough. You start to play mind games with yourself and worry that after you sell it, it’s going to make a huge move to the upside. This by the way, rarely happens. Weak funds tend to get weaker and strong funds tend to get stronger. The psychological trick we use to get around this is to remind ourselves that we can always get back into a fund at a later date, should it come back to life in the future. This gives us the reassurance that we’re not going to miss out if it makes a major move to the upside.
More tips on buying and selling funds
To achieve success, it’s important to have clear objectives. For example, one of our goals is to buy a fund that will outperform the market and sell it when it’s been underperforming over a significant amount of time. We always like to be aware what market cycle we are in and whether it’s a bull or a bear cycle. If we are in a bull market we remain fully invested but in bear markets we raise cash.
Try to adopt an attitude of constant learning and if you really want to get good at knowing when to buy and when to exit funds, read as many books as you can on technical analysis and investment psychology. We also suggest that you make a habit of analysing each and every trade you make and trying to learn from your mistakes.
The easy route
However, if you don’t have the time or intention to learn how to improve the buying and selling of your funds, you could take the easy route and get some expert guidance from people who know what they are doing. Subscribe to services that will help you become a better trader and never delegate the investment process to a person or company – ever. Instead, we recommend you always keep full control of your investment decisions but seek out experts who can provide guidance rather than specific and personalised advice.
Aim to find a person or company that you can invest with side by side. We suggest you attend as many reputable investment seminars as you can and subscribe to the best investment blogs you can find. The key is to continue to keep upgrading your skills and knowledge throughout your life and always learn from investors with proven track records.
Remember, if you would like to know more, please just download our free report Fund Timing: When to Buy and When to Exit.
As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
ISACO specialises in ISA and SIPP Investment and is the pioneer of ‘Shadow Investment’; an easy way to grow your ISA and SIPP at low cost. Together with our clients, we have an estimated £57 million actively invested in ISAs and pensions*. Clients like us because we have a great track record of ‘beating’ the FTSE 100**. Over the last 16 years, we’ve outperformed the Footsie by 60.2% and over the last 5 years, we’ve averaged 14.5% each year versus the FTSE 100’s 8.8%. You can find us at www.ISACO.co.uk.
What is Shadow Investment?
Picking the right fund for your ISA and SIPP is not exactly the easiest job in the world. And knowing 'when' to buy and 'when' to exit is even more difficult! Our ‘Shadow Investment’ Service is here to help. Our service allows you to look over our shoulder and buy the same funds that we are buying.
When we are thinking of buying a fund, we alert you so that you have the opportunity to buy it on the same day that we buy it. We also tell you about when we are planning to exit the fund. You control your investment account, not us. You can start small and invest as little or as much money as you like.
By knowing what we are buying, when we are buying and when we are exiting, throughout the year you can mirror our movements and in effect replicate our trades. This means you have the opportunity to benefit from exactly the same investment returns that we get. Our investment aims are 10–12% per year.
We are totally independent, fully transparent and FCA compliant. We’re warm, friendly and highly responsive and it’s a very personal service that gives you direct access to the Sutherland brothers; ISACO’s two founders.
Who are ISACO’s clients?
Clients who benefit most from our service have over £250,000 actively invested and the majority of them are wealthy retirees, business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector, such as IFAs and wealth managers.
Do you have questions?
To have all your questions answered, call 0800 170 7750 or email us at: info@ISACO.co.uk.
*November 15th 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients.
**Long-term performance: December 31st 1997 - December 31st 2013 ISACO 91.3%, FTSE 100 31.1%. 5 year performance: December 31st 2008 - December 31st 2013. ISACO Investment performance verified by Independent Executives Ltd.