Keith Richards

Do you know people who have outlived their own life expectancy?  People who break all of the rules but somehow keep living?  Keith Richards of the Rolling Stones is an example – despite (or maybe because of?) his hard-living, he is now still rocking at age 74.  I knew a man whose father passed at a young age and who himself was overweight, drank a lot, and smoked, yet he still made it into his mid-70’s.

Conversely, do you know people who did everything right but still died young, struck down by a heart attack or stroke well before their time?  Jim Fixx, author of The Complete Book of Running, and a healthy living advocate, had a heart attack and died while jogging at age 52.  A woman I know lived a healthy life but was felled by a stoke in her 40’s.  Very sad.

Life Expectancy

I am very proud to be a Certified Financial Planner™, but I am always uncomfortable in making the Life Expectancy assumption when trying to figure out how many years a client is going to live or how many years they will require money.  It is a crap shoot at best.  It is a guess.  Its only purpose is to complete a financial projection.  You don’t know when your time will be up; when your number will be called.  Countless songs have been written about it, especially in the Country & Western genre.  You can do all the right things, play by the rules, and still die much too young; or you can break all the healthy-living rules and still live a long life.  It’s not fair.

What To Do?

The least helpful thing you can do is to worry about when you are going to die because it is unhealthy to do so.  Worrying doesn’t help.  Live your life, enjoy your job, family, community, country, children, and grandchildren.  Go about your business.  The Grim Reaper will come when he wants to, not when you want him to come, or when you have an appointment.


This next leads to the logical argument about the usefulness of planning.  Why plan if you don’t really know when the plan will end?  Good question, but there is much more to planning than making accurate assumptions about when you will die.  Just the act of planning and the execution of that plan on a daily basis gives you something to work for, to live for.  The plan gives you an arbitrary standard upon which to base the scoring of your life’s work.  Your first column in the Excel spreadsheet of your life is Plan.  The second column is Actual, and the third column is Difference.  If you had planned to save $1,000 per month for the next year and you actually did so, not only do you feel good about the savings, you also feel good about having executed on your plan.  What about dieting?  Same thing.  If your New Year’s Resolution is to lose 20 and you actually lose 20, you win in two ways: by feeling lighter by losing 20 and by accomplishing what you set out to do.  Increasing your savings and losing weight are admittedly short-term plans, but they can lead to longer-term goals.


Planning and working with a Certified Financial Planner™ is important not because you are trying to predict accurately when you are going to die, but because it will help you gain a purpose for your life and its works, and it will help you feel better about yourself when you achieve your plan.  If you don’t achieve your goals, maybe you need to reassess your goals, or maybe something happened in the interim to kibosh your goals, but at least you tried and can feel good about that.  Please contact me if you want to set your financial plan so that you can feel better about yourself.


Vanguard and Amazon

In Retail, Amazon is trying to take over the world.  Together with WalMart, Amazon is trying to use their scale to create a superior customer experience at a greater value point than other retailers, in seemingly all products.  Small retailers are suffering.  Traditional downtown retail areas and malls are suffering.  Mall space is being converted from retail to other uses.  Havoc is being wreaked.


Similarly, in the investing world, Vanguard is trying to take over the world, and doing so on the basis of being the low-cost provider.  Vanguard’s growth has coincided with the explosion in interest in Index Funds, which are mutual funds or exchange-traded funds that seek to replicate an index.  You can buy the Vanguard S&P 500 Index ETF for $0 commission and a 4 basis point annual expense ratio.  That is cheap!  Lower fees = more money you keep in your account.  It is hard to beat that if you are content with the Vanguard universe of Funds and ETF’s.  It has worked, and Vanguard is projecting it will work even more going forward.  According to Bloomberg, Vanguard’s assets under management was over $4.7 Trillion as of Q4 2017 and projected to grow to $10 Trillion (with a T) by 2023.  Wow!

Personal Advisor Services

In a standard Vanguard account, you are on your own.  There are no brokers to talk to or to give you advice.  Vanguard has customer service help, which can help with placing an order, but there is no investment advice in a standard Vanguard account.  If you want a more hands-on approach, you can open an account in a relatively new division called Vanguard Personal Advisor Services. The fee for Personal Advisor Services is 30 basis points annually times your account balance.  Vanguard’s Advisors are paid salary only, with no commission, so they are not directly incentivized to sell more.  3o basis points are cheap as compared with the typical 1% to 2% fee that many advisors charge.  It is very difficult for traditional advisors, particularly independent advisors (such as my firm) to compete.  Independents need to offer a better value proposition.  More on that later.


In establishing the Personal Advisor Services group, Vanguard went beyond just offering a “Robo-Advisor” option.  A Robo-Advisor is a service whereby your portfolio is positioned and periodically rebalanced by a computer algorithm.  There is no human interaction with a Robo-Advisor – just the client and the advisory firm’s algorithm.  Robo-Advisor firms include WealthFront and Betterment.  Vanguard decided its clients wanted more than just an algorithm.  With its size, Vanguard could provide both an algorithm and an actual human being to speak with at about the same 30 basis point fee.  That’s tough for the Betterments of the world to compete with.

Value Proposition

Independent advisors need to offer something more than what Vanguard offers for 30 basis points.  One valuable aspect might be the ability to keep the same individual advisor.  At Vanguard, unless you have over $500,000 in their account, your Personal Advisor will be whoever answers the phone when you call in.  If you have over $500,000 at Vanguard, then you are part of the Voyager Select program, and you will be placed with a specific advisor.  Another valuable part of an Independent’s business might be total financial planning, including estate, gift, education, insurance and any other financial planning needs that Vanguard may not be set up to do.  In addition, an Independent might be more likely to offer outside-the-box thinking, and perhaps more able to solve more complex financial problems or achieve complex goals.  Lastly, it is unlikely you will receive an honest, off-the-cuff blog such as this from a Vanguard advisor – they are more likely going to toe the corporate line.


It will be difficult going forward for independent advisors, as well as advisors from other traditional brokerages such as Merrill Lynch, to compete with Vanguard.  We have to be smart about how we market ourselves and clearly state how what we offer is valuable enough that a client will choose us over Vanguard.


The stock market tends to trade based on narratives.  Narratives are stories that try to make sense of the various data.  The financial media as well as analysts that work for the big Wall Street firms put forward the narratives.  The narratives can be self-serving to those that put them forward:  they may provide a slick theory as to why things didn’t go as they previously thought, or they try to persuade current and potential customers that their view of the world is more appropriate than other views of the world.

This notion of narratives is important to you because rather than trading on fundamentals such as earnings, sales, growth, etc., the market trades on these narratives.  The job of an investor (as well as of an investment manager) is to sort through the narrative and determine which are valid and which are bogus.  Sorting through narratives requires nuance.  It’s as if you are watching to see what others do with the narrative and react accordingly, rather than judge something as undervalued or overvalued based on intrinsic factors and buy or sell accordingly.

It seems there is often one story, one narrative, that dominates all of the talk related to the stock market.  Sometimes more than one, and they can be linked, but usually there is one dominant narrative.  During this turbulent period we have faced in February 2018, the narrative is that inflation is back and interest rates are on the rise.  The premium we pay for stocks (over bonds) will decrease, and corporate earnings will suffer.  All because a 100 basis point or so rise in future interest rates.  Will this be proven correct?  Nobody knows, but stock investors are preparing for the worst, after having lived through an easier investment climate for the past year plus.  It’s difficult when your assumptions change.

What about you?  Do you believe this is an over-hyped narrative, or do you think it is totally valid?  Or do you think it is hard to tell?  I am probably in the “hard-to-tell” camp, leaning toward over-hyped.

Past narratives include:

  • Oil prices are falling and this will be good for the economy because it will reduce energy costs for US industry as well as at the gas pump.  This was in late 2015, as oil hit $60/barrell and started to trend downward.
  • Oil prices are falling and this will be bad for the economy because the US is now one of the largest oil producers in the world and a good deal of our job growth has been in the oil drilling sector.  This was in early 2016, as oil ultimately got below $30/barrell.
  • Greece is going bankrupt and this could also mean the end for the European Union and therefore disrupt the world’s economy.  Remember when Greece seemed like the only economic news being reported?  This was about 3 years ago.
  • 2008:  The subprime mortgage market is showing an increasing default rate, which is causing problems in the housing industry, and ultimately in the entire banking industry.  This narrative, it turned out, had legs, probably because we were seeing just the tip of the iceberg early on and the vastness of the problem and the intertwining of the various banks became revealed as time went on.

There are many, many others.  The narrative changes sometimes every day, as the media tries to sum up each day’s market action with a quippy soundbite that tries to get it right.


I believe narratives serve a purpose, but as investors, you need to recognize the narrative and its purpose and decide for yourself how valid it is.  Sometimes, the narrative becomes more overwhelming than it should be.  Alternatively, if you don’t have time to keep up with the news yourself, if you are too busy with your own job and family, you can delegate that job to an able, experienced investment manager and live with their decisions.  Please contact me if you are so inclined.

Market Volatility

The big sell-off in the stock markets on Monday, February 5 was unusual but not unprecedented nor unexpected in percentage terms.  The S&P 500 Index lost 4.1% on that day.  A Page 1 article in the Wall Street Journal on the next day titled “What Should We Make of the Stock Price Drop” contained information about the frequency of large selloff’s.  Here is a link to the article:

In a chart, the article shows that we get a movement (up or down) of 4% or greater about 0.6% of the time, which is about 1 trading day per year.  In statistical terms, Monday’s 4.1% drop was a between 2 and 3 standard deviation event:  3 standard deviations mean some result is expected 99.7% of the time, so the 4.1% sell of wasn’t quite a 3 standard deviation event, but almost.  This is based on actual data since 1964.  So, you would expect not to have another 4.1% or greater move this year, if past performance is an accurate indicator.  Or is it?


Author Nassim Nicholas Taleb would question whether you can rely on the statistics of the past to see what the future might be like.  Taleb is famous for pointing out the concept of Fat Tails, which implies that unusual events like February 5 are really not that unusual.  Weird stuff happens more frequently than you think, according to Taleb.  Expect and prepare for weird stuff.


In a different WSJ article, also on February 6, a reporter asked former US Secretary of State Henry Kissinger for advice about writing a column about foreign affairs.  Kissinger’s advice was one word: “Context”.  That applies to the stock market, as well.  Noting that the market has moved 4% or greater in a day about 1 trading day per year is useful as a context for the February 5 move.  However, it doesn’t mean that we won’t have more frequent 4% moves in the future – just that they have happened only every so often in the past.

How to Prepare

Most investors made it through Monday’s selloff and lived.  Only those that were heavily into shorting market volatility got really burned, but that’s an esoteric side of the trading universe.  There will likely be more bumps along the way to hopeful recovery.  I don’t think it is necessary to bubble-wrap your portfolio to prepare for every eventuality.  That said, portfolios that were well-diversified among different asset classes (stocks, bonds, foreign, commodities, real estate) fared better as a whole during the selloff than did stocks-only portfolios.  I believe it is best to prepare for 3 Sigma or fat tail events by being well diversified.  Why is that?  Because investors who sell an asset in a crisis move the money that they got from selling into another asset in another asset class that they perceive as being safer.  Collectively, as many investors do the same thing, the price of that new asset will go up due to supply and demand.


The amount of the decline – 1,175 points on the Dow – got the headlines, but 4.1% is really not that unusual.  When you get to the nosebleed section, a 4.1% fall seems like a really big fall, and you fall a long way.  Don’t let the decline scare you away.  The road can be bumpy.  The flight can be turbulent.  Use any metaphor you want.  It is best to stay in the car or on the plane.  Keep going.  Stay invested.  Stay diversified, and you will hopefully achieve your financial goals.


One way to think about the economy is through the equation MV = PQ.  Money times Velocity equals Price times Quantity.  Also called the Equation of Exchange, MV = PQ is the basis for the Monetarist School espoused by Milton Friedman.  MV = PQ implies that the money supply affects prices, other factors being equal.  An increase in the money supply must lead to an increase in prices.  After all, the Velocity of money is relatively constant, right?  This is a concept at the 50,000 foot-level of macroeconomics.  Big picture.

Money Supply

M2 Money Supply has been increasing rapidly in the US since the Financial Crisis of 10 years ago.  The US Treasury prints the money but the Federal Reserve Bank controls the amount of money in circulation.  Increasing the money supply is stimulative and it was thought that increasing the money supply would stimulate the economy and help bring it out of the Recession of 10 years ago.  According to the St. Louis Federal Reserve website, the M2 money supply has increased from about $7.5 Trillion in November 2007 (the beginning of the Recession) to about $13.8 Trillion currently, a near doubling in about 10 years, and about 7% average per year.  Here is a link to the website with that information:

This money printing program has continued even in the past year, despite the better economic growth and unemployment indicators.  M2 is up 4.7% just in the past year.


One would think that higher inflation would result from the increase in the money supply, but it has not.  Inflation has averaged about 1.6% over the past 10 years, according to the Bureau of Labor and Statistics.  Here is the link to a chart of monthly inflation:

Why has the huge increase in the money supply not caused inflation?  There are many explanations out there for the causes of dormant inflation, including the following:

  • Global labor surplus:  There is no shortage of cheap labor in other countries, and as companies offshore their manufacturing, the cost of goods remains inexpensive.
  • Slow Wage Growth:  US wages have remained stagnant, and real wage growth (adjusted for inflation) has been near zero for the past 10 years.  That 2% raise that you receive every year?  It only keeps up with inflation rates
  • Too much debt:  At the household level and at the government level, we have been overburdened with debt.  When your first priority is to pay your lender every month, you don’t have as much money to buy new stuff.  This dampens inflation.


Another explanation for low inflation is lower Velocity.  Velocity is the number of times that a dollar is spent.  When you earn money, you either spend it or save it.  When you spend it, the company whose product you bought your product puts your spent dollar to use, either by paying its employees or buying new raw materials.  Hence velocity.  When you save it, you either put it into the bank so that the bank can, in turn, lend it out, or you invest it in a company’s equity, which, in turn, will also put it to good use.  Hence velocity through savings or investment.

Where the equation has changed in the past 10 years is that companies have not been spending their cash as quickly.  They have not hiked salaries commensurate with their profits, and they have not reinvested or redeployed their capital as much.  Take Apple, for instance.  Its iPhone has been a high profit-margin cash cow.  Its employees are already highly and fairly compensated.  They have not found another product that can replicate the profit margins that the iPhone can, either internally or externally.  So, their corporate cash grows and grows – as of Q2 2017 they had over $260 Billion of cash.  Presumably, it is mostly invested in US Treasury securities or derivatives thereof.  The same phenomenon has occurred with banks.  Instead of lending out money so that companies and businesses may grow, they have been increasingly just investing their excess cash back into riskless US Treasuries.  Loan-to-deposit ratios nationwide trended downward through the recovery after the 2008 Recession, although that trend has turned around somewhat recently.  Here is an article by Trefis Research that speaks to trends in loan-to-deposit ratios:

Why have companies and banks been hoarding cash instead of redeploying it back into the economy?  Several reasons:

  • Aversion to risk:  Banks would rather take no risk and lend to the US Government than take a business risk by lending to companies.  Banks got burned in the mortgage crisis so that dampened mortgage lending for a while, but mortgage lending is strong again.  The penalties for making the wrong bet on risk are stout, so banks have not been taking a risk.
  • Lack of accretive investments:  As the stock market has risen, potential acquisition targets have been bid upward, so there are fewer businesses out there to buy that would add to corporate earnings.
  • If you put your hand on the stove, you learn it hurts, so you don’t do it again:  Businesses have been burned in the past by not having sufficient cash on hand, so they want to have enough for future rainy days.  This is unlike any federal, state or local government out there, which have no rainy day funds.  Maybe I am mixing too many metaphors.
  • Regulations and Accounting Changes:  This also falls into the contingency bucket.  Businesses want to make sure they have enough cash to ride out any problems.


Again, this post is about big picture macroeconomic issues.  I believe that there is a lot of “pent-up velocity” out there, for lack of a better term.  Companies have been hoarding their cash for the past 10 years  There are signs that this practice has been reversing.  If it does, I believe there is a lot of potential growth out there that hasn’t been accounted for yet.  2% inflation is nothing to be worried about, yet.  The Fed, as well as investors, have their collective eyes on inflation.  As long as inflation remains in the 2% range, I think this economy and this stock market still has room to run.

Long-Term Care Insurance

The Long-Term Care Insurance market is collapsing.  A recent Wall Street Journal article pointed this out.  It is a nice article, written to high journalistic standards, but written more from the standpoint of the insurers rather than from the insureds.  I write to the insureds, and my interpretation of the article is the following:  If you don’t already have LTC insurance, you won’t get it.  Especially if you have any pre-existing conditions, you are Skeee-rewed!  I have some experience with this market through clients and insurance agents that I will share below.  Here is a link to the article:

The article states that there were fewer than 100,000 LTC policies sold in the US in 2016 and the pace was at fewer than 70,000 through the first half of 2017.  Sales peaked at about 750,000 policies at about 750,000 policies in 2002.  That’s a decline of about 90%.  That’s a collapse of a market.

Long-Term Care

Long-Term Care insurance is supposed to insure against the costs that you will likely incur when you get older and/or become ill.  In addition to nursing home care, LTC insurance also covers in-home care and home health aids, as long as the insured cannot accomplish various Activities of Daily Living, or ADL’s, such as bathing, feeding, getting out of bed, etc, on their own.  We probably all know some or many people, perhaps family members, who have needed a home health aide or a nursing home.

Aging Boomers

Demographics do not bode well for the LTC insurance market.  Conversely, they bode very well for the homes and service providers.  The largest generation in US history is reaching the age that they will need assistance, if not full-time care.  The insurers are getting caught in this trap and they are retreating.  The following are some of the reasons given in the WSJ article for why insurers are losing money on LTC insurance:

  • Insurers overestimated how many people would opt for care given by family members and underestimated how many older people instead would opt for extended care or nursing homes.  Maybe it was the frazzled family members who opted the older relatives into the homes.
  • Insurers underestimated how much home residents have enjoyed their new living arrangement and how relatively well they have thrived and how long they have lived once inside the homes.  This meant insurers’ payouts were much greater than originally anticipated.
  • I infer from the WSJ article that policies written at the beginning of the LTC insurance industry, say 40-50 years ago, had no cap on payouts, but were able to increase premiums with permission from the relevant State insurance commissioner.  If so, these insurers are really screwed.  Genworth is mentioned.  More recent policies do have a cap on payouts.  Even so, insurers underestimated how much they would pay out and for how long.
  • Reinvestment rates are half of what was anticipated, if that.  Insurers collect your premium money and invest it, mostly in various bonds, and hold it for anticipated payouts.  Actuaries get involved.  This is how insurance companies make money.  As interest rates have decreased to near zero or negative in some places, insurers have suffered.
  • Policies are not lapsing as anticipated.  Only 1% per year are lapsing, vs. 5% anticipated by the actuaries.  LTC policyholders are diligent in their planning and in their payment of premiums.
  • Cost of care has skyrocketed.  That is the subject of a whole column to be written.


We financial planners tell clients that they really need to get LTC insurance in order to offload the risk that they might someday need to be taken care of.  Unless you are young, healthy, and not on any medications or at least not adding or changing any medications, you most likely won’t be able to buy your LTC insurance.  Insurers are finding any way not to write new policies, citing risks related to unstable health history, among other excuses.  At the same time, married couples have been having fewer children, meaning that families are smaller than they used to be, meaning that there are fewer children available and willing and able to take care of elderly parents, meaning these elderly are going into and staying in homes.  Being simply sick or disabled is one thing.  Having Alzheimer’s or other disease-related dementia requires a whole other level of care that is above and beyond the pay grade of family members who may have younger family members of their own that need care.  All of this means that you need to save for your own care, probably way more than you thought you would need to save.

Our society stresses eating vegetables, eating well, and living a healthy lifestyle so that you can enjoy the life you have and so that you won’t die young.  Then, after having lived said healthy lifestyle, you still get sick and need care when you get old.  So, is the trope that you need to eat healthy just a conspiracy put forward by the nursing home industry to ensure that they have full beds going forward?  I don’t think there is a conspiracy, but it is one of the ironies of life and it does stink.

The Elevator

An old saying on Wall Street is that stocks take the stairs up and the elevator down.  As I write this, after the close on Monday, February 5, it is clear that the elevator is packed.  The Dow Jones Industrial Average is down 1,800 points over the past 2 days.  Today’s 1,175 point drop was the biggest point drop ever.  While the sizes of these point drops are high, percentage-wise, they are reasonable:  The Dow is down about 7% from its all-time high, which we hit a little over a week ago.


There are a lot of reasons being given by the financial media as well as market analysts as to why we are seeing this sell-off.  My take regarding these reasons is that they are valid but that they should not result in panic selling:

  • Friday’s Jobs Report was too strong:  The US economy added 200,000 jobs instead of the expected 160,000.  In the convoluted reasoning of Wall Street, this is bad news because it means the economy is growing stronger than expected.  Don’t surprise Wall Street analysts, or it will come back to bite you.
  • Interest Rates are Rising:  Yes they are, but the rise seems to be in line with expectations, and it is probably a healthy thing.  The Fed has said they intend to raise short-term rates by 75 basis points this year.  The speculation now is that the Fed will raise more than that.  The market can handle 100 basis points.  The 10 Year Treasury Bond yield has now risen to 2.88%, from the 2.4%-range as of 1/1/18.  However, at 1/1/18, the yield curve was too flat, meaning the difference between short-term and long-term rates was too small.  The yield curve is now steepening, which is a sign that investors see the future as good.  There was no good reason why the yield curve was flattening.  A flattening or an inverted yield curve portends a recession, and there are no signs of recession looming out there.
  • Technical Indicator Busted:  The major averages today traded below the 50-day moving average, which is a technical indicator.  Some algorithms are programmed to sell when a security breaches the 50-day moving average.  A breach of a technical indicator is not a sign that there is something fundamentally wrong with the economy, although it is not without meaning.
  • Program Trading:  At one point, late during today’s trading session, the DJIA dropped about 1,000 points over the course of about 30 minutes.  That is almost always indicative of a large institutional trader trying to exit a large position at market.  Again, this does not mean there is something wrong with the economy, just that there was a big seller for whatever reason.
  • The VIX:  The VIX Index moved up 115% today alone.  Because the VIX Index is made up of Put options, Put options being options to sell at a given price, the explosion in the VIX today is almost certainly because of large institutional investors piling into Puts.

Not a Reason Given

What is not given as a reason for this market sell-off is anything major that was unexpected or anything deeply fundamentally wrong with the economy.  For instance, the 2007-2008 sell-off was due to the revelation that there was insufficient or even fraudulent collateral behind the mortgage-backed securities market.  The sell-off in August 2015 was due to an unexpected devaluation of the Chinese currency.  Likewise, the correction in January-February 2016 was caused by China issues.  Other sell-offs were triggered by information that the economic or financial world was about to upend.  There is nothing out there to indicate we are about to go into a recession, either here in the US or in most other major economies.  China is not changing course right now.


Since I don’t see anything that is fundamentally changing with the economy, and while there are always geopolitical issues looming out there, there is nothing imminent.  The Market has traded steadily upward, taking the steps, especially since President Trump’s election in November 2016, without ever having had a correction.  Markets never go straight up forever.  There is always digestion required.  What we have seen in the last few days is the return of the volatility that we haven’t seen for many months, but that is historically normal.  The elevator down was empty, and a lot of people piled in.  I am not saying this is a dip to buy, but I do believe this sell-off is not indicative of a major change for the worse in the economy.  Remain calm.  At least for now.


When To Sell?

2018 is off to a roaring start in the stock markets, both in the US and abroad.  (By the way:  I say “twenty eighteen”, and try to avoid “two thousand eighteen”.  How about you?)  US markets are up for a variety of reasons, not the least of which is optimism based on corporate tax cuts.  International markets, particularly in emerging markets, are up in part because the US Dollar has fallen.  When I say emerging markets are up, I mean in US dollar-denominated terms.  Some media types think the market is too frothy – the CAPE ratio (cyclically-adjusted price-earnings) is near an all-time high; the bull market has gone on too long and it has to end sometime;  interest rates are bound to go up; etc.   These are the reasons given why the bull market won’t last much longer.  The nay-sayers may be right.  Who knows?


If you are currently long in the market, even maybe through your 401k or equivalent retirement account, you may justifiably be suffering from a case of vertigo.  You like the view up here, but you are looking down and getting dizzy.  That’s ok.  It’s natural to be concerned.  You have gains and you want to protect those gains.  Should you sell part or all of your stocks, take profits, and move to something safer?  Should I do it now, or is there room for the market to run some more?  If I sell now, will I suffer from FOMO (Fear of missing out)?


There is no wrong answer, but there are answers that can cost you some money.  You can go on gut instinct, which may work especially if you follow the market.  You can watch CNBC or Bloomberg and consider what the talking heads there are saying.  However, the best way to think about when to sell is to use some simple rules.  Rules-based selling is the way many professional money managers make their Sell decisions.

What rule should I use to sell?  There are several in use out there.  Each may be appropriate given different market circumstances.  Here is a list of rules that you can consider:

  • Sell when your stock hits your price target that you had set up when you bought it.  If you were looking for a 10% profit when you bought the stock and you get it, just sell.  Don’t second-guess yourself.  Make it a hard and fast rule.  Maybe you even put in a limit order to sell.  The problem is, what if you sell and the stock then continues to run?  You may suffer a severe case of FOMO.  I have found that a target price rule works better with a short-term or day trade and that there are too many variables to consider if you are a long-term holder, especially in a retirement account.
  • Sell when your stock falls below some percentage of what you bought it for, say 7% to 9%.  Take the price that you bought it for, and if it falls 7% from that price, sell it, no matter the extenuating circumstances.  Cutting your losses in this way is a very important part of money management.  Live to fight another battle.  One big loser can tank your portfolio’s overall performance.  This rule is espoused by Investor’s Business Daily, among many others.  However, if your stock has run up, you don’t want it to run back down and then lose 7% after having been in the black.  That’s not good for the psyche.
  • Sell when the stock falls below a technical indicator, such as the 50-day or 200-day moving average.   Famous investor Paul Tudor Jones uses the 200-day moving average rule.  You can find the 200-day SMA (Simple Moving Average) in most free stock charting websites such as FINVIZ and StockCharts.  Falling below the 200-day SMA is sometimes a sign of inherent weakness in a stock.  You can still book a profit – the SMA may be higher than your purchase price.
  • Sell part of your stock, enough to refund yourself for what you paid for it, and hold the rest.  This is called Playing with House Money.  Or maybe just sell to refund a part of your investment but keep the rest.  This is a good way to look at selling in the current market if you have some profitable holdings.
  • Sell if the overall market goes into a correction.  Most individual stocks move mostly in concert with the broader market.  It is highly unlikely that your stock will buck the trend if the trend is downward.  How can you tell if the market is in a correction?  Look at maybe 10% below the peak as a correction, and look at 20% below the peak as a Bear Market.  Likely the 200-day SMA rule would also be triggered in this case.


I am an advocate of rules-based buying and selling.  If your instinct tells you that you should sell, or if the talking heads on CNBC are striking fear into your heart, at least you should look at some of the rules I outline here might apply.  Don’t go only on your instinct or what others are saying.  Then, the last rule:  Once you sell, don’t look back.  Every day is a new day with different factors that play into buy and sell decisions.  Don’t come down with FOMO.