Develop a Sell Discipline

Come take a look. We were recently quoted in a UK Magazine – Fundstrategy.co.uk. The story was about Lessons learned from the financial crisis. The reporter interviewed several advisors. Yours truely was Lesson 9 – Develop a Sell Discipline.  Always fun to be quoted in the Media. 

New Covenant, by Venessa Drucker

Imagine a day at the races. You have lost your allotted gambling money. Do you go to a cash machine, to withdraw some more, or do you call it quits when you reach your threshold?

Every investor knows that selling is much harder than going shopping for securities. “Our whole industry is predicated on buy, buy, buy!” sighs Matt Hudgins at Mosaic Wealth Management in Atlanta, Georgia. He likes to dollar cost average his way out of a position, just as he would dollar cost his way into one.

Clients claim they understand a sell discipline when it is explained to them in advance, but when the time comes to take a loss they may balk. Studies in Prospect theory, developed by Daniel Kahneman and Amos Tversky, showed that subjects felt the pain of a financial loss about twice as bitterly as they enjoyed the pleasure of gaining an equal profit. Last year, however, investors were more willing to unload their losers.

“That difficulty was overcome by fear of the market going to zero, irrational as it may be,” Hudgins explains.

Hudgins himself has learned to understand better his clients’ risk tolerances, and how much volatility they can take. “They are all brave souls before a crisis, but ­during a crisis it is a different story.”

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