What is your Sell Discipline

When I ask this question, most don’t have anything to say except, “my advisor handles that.” Of course, my next question is, “so, what is your advisor’s sell discipline?” Once I explain the importance of having not only a buy discipline but also a sell discipline, they become intrigued. I will attempt to explain that to you here.

Most financial advisers are not portfolio managers. They will tell you this on the front end. They often describe their role as a “portfolio manager of portfolio managers.” They “hire” portfolio managers on your behalf by purchasing mutual funds. They explain with eloquence Modern Portfolio Theory (MPT), and the benefit of diversification and rebalancing. THIS IS NOT ACTIVE MANAGEMENT. Most followers of MPT tell you that rebalancing is the appropriate sell discipline. This really means, winning stocks are sold to buy losing stocks. Most often it is explained that a sell discipline is a horrible strategy and buying and holding is superior. They may give you what I call Falsified Facts, such as “if you miss the 10 best days of the stock market over 30 years you would actually have negative returns.” This is true, however, it is a one sided argument, and your next question should be, “what if I miss the 10 worst days?” One study shows missing the 10 worst days more than triples a buy and hold strategy, however both arguments are flawed and misleading.

When you are young with many years of expected work ahead of you, buying a portfolio and dollar cost averaging into that portfolio over many bull and bear markets is actually beneficial. You are not in need of tapping your retirement assets for income, so time is on your side. I believe the most important risk to an investment portfolio is time, not the standard deviation as MPT would like you to believe. When you are young time will allow you to accumulate shares while in a bear market and time will allow your portfolio to heal when the next bull market arrives. So having a sell discipline in your younger years is not as important in my opinion.

When you retire or are near retirement, a sell discipline becomes all the more important. Your nest egg is likely, substantially more than it was 20 years ago and your financial advisor has projected out “average annual” returns that are positive for the rest of your retirement; this is pure speculation. Upon retirement you will likely begin taking income from your nest egg based on your needs and what your adviser believes to prudent. This is “reverse dollar-cost averaging” you no longer have time on your side. Let me give you two hypothetical examples:


  • Retirement Date = January 1990
  • Nest Egg = %500,000
  • Income needed = $25,000/Yr or $2,083/Month
  • Advisory Fee = 1%
  • Mutual Fund fees = 1%
  • Compound Annual Growth Rate (CAGR) of S&P 500 (1990-1999) = 15.32%
  • After fee Returns = 13.32%
  • Portfolio Value after 10 years = $1,362,599

The above example is if you are lucky enough to retire at the start of a great bull market. The annual returns during the 1990s were in the double digits and my constant preaching that all portfolio strategies need a sell discipline would most certainly have fallen on deaf ears.

Let’s look at another example:


  • Retirement Date = January 2000
  • Nest Egg = $500,000
  • Income needed = $25,000/Year or $2083/Month
  • Advisor Fee = 1%
  • Mutual Fund Fee = 1%
  • CAGR of S&P 500 = 2000-2009 = -2.7%
  • After Fees = -4.7%
  • 10 Year Portfolio Value = $112,471

The above example is a ten-year period as well, however this was the start of a Secular Bear market. As you can see this scenario is would make any retiree sick to their stomach. At this point a retiree may be forced back to work or to permanently reduce their standard of living.

Both of these scenarios are based on index returns which cannot be bought directly and assumes being investing 100%. The point is, if you do not have a sell discipline to move your assets to safety you are at the mercy of “Mr. Market.” This means you buy and hope the market is on the verge of a major bull market.

There are drawbacks to having a sell discipline, at times it is possible to sell and the market continues to move higher. There is not a perfect investment strategy that does not have a drawback. The key is discipline. Another reason I believe it is prudent to have a sell discipline during your later working and retirement years is due to the “Law of Percentages.” Let me explain by first showing you the math behind the concept.

Breakeven = %loss/1-%loss

If your portfolio loses 10% then your breakeven would be: 10%/1-10% = 0.1/1.0-0.1 = 0.1/0.9 = .1111 or 11%. If your portfolio loses 25% of its value, the breakeven is 33.33%. The easiest example is if a portfolio loses 50%. It takes 100% to breakeven.

So the next time you interview a financial advisor for the position of portfolio manager, be sure to ask the question, “What is your sell discipline?” If they don’t answer to your satisfaction, move on. Remember, you should think of your financial advisor just like you do your doctor. They hold the key to your financial health.

(c) Perissos Private Wealth Management, LLC



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