Investing in Today’s Stock Market? Why Having a Sell Discipline Is Key To Long-Term Success

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Chris Nichols

Nichols Wealth Partners

For many investors, the excitement of potentially seeing their money grow is one of the main reasons they invest. The growth of their funds allows investors to accomplish many things like retiring early or “on time”, possibly buying a vacation home or simply seeing their net worth become more robust.

Challenges often occur when investors forget about understanding things like investment risks or the potential for losses.  And, too often when their portfolio is down or when they’ve lost money, hindsight becomes perfectly clear. When we advise our clients we take into account factors such as their risk tolerance, financial goals and assets. We also share with  them our thoughts and beliefs about having a long-term approach that, along the way, includes a “winning by not losing” investment philosophy. Billionaire investor Warren Buffet is famously quoted as saying “Rule number 1, never lose money, Rule number 2, never forget Rule number 1.”  One of his main objectives is the return of his original investment.

Now, it is nearly impossible to make money on every investment as even Mr. Buffett has made bad investment decisions over the years (buying a large newspaper conglomerate in 2012 is one example).  However, an investor’s ability to mitigate or eliminate losses in bad markets could result in better returns over the long-term. In our experience, many investors do not have a plan in place to protect their portfolio when the next bad stock market occurs. It’s like driving a car on I-95 without a seatbelt or riding a motorcycle a high speeds without a helmet – there’s no protection in the event of an accident. Take, for example, the investment returns of the two hypothetical investment portfolios below. Portfolio A is in an investment strategy that has a proactive sell discipline strategy that will likely mitigate or reduce losses in bad stock markets and participate in some of the market gains when there are positive market returns. Conversely, Portfolio B is an investment strategy that has no proactive sell discipline strategy that will likely suffer large losses in bad or down stock markets and participate in most of the gains when there are positive returns. Let’s assume an investor started with $100,000:


End of Year Portfolio A Return Portfolio A Value Portfolio B Return Portfolio B Value
1 5% $105,000 11% $111,000
2 2.5% $107,625 13% $125,430
3 4% $111,930 4% $130,447
4 -3% $108,572 -22% $101,748
5 -6% $102,057 -18% $83,433
6 7% $109,201 11% $92,611
7 15% $125,581 25% $115,763
8 10% $138,139 8% $125,024
9 5% $145,046 10% $137,570
10 7.5% $155,924 7.5% $147,888


Clearly Portfolio A’s returns did not perform nearly as well as Portfolio B’s return in most of the “up” years. On the other hand, in Portfolio B, the losses in years 4 and 5 were significantly worse than Portfolio A’s returns (losses) in those same years. At the end of 10 years, the initial investment of $100,000 grew more in Portfolio A’s strategy and one of the reasons this occurred is because there was a “sell discipline” in place. The investment manager or strategy had a predetermined plan in place in anticipation of “bad things” (bad stock markets) to come.  As we mentioned, many investors like investing in stocks because it gives them an opportunity to potentially make money over a period time. On the other hand, what causes investors to be fearful of investing in stocks is the possibility of losing. So, if that’s the case, wouldn’t it make sense to invest with an investment manager or in a strategy that has a proven long-term track record of gains in good years and, just as importantly, the ability to lower losses when stocks are down? We know that past performance is no guarantee for future results but what past performance can do is give an investor a reasonable idea of how an investment may perform in good and bad years and potentially more confidence to weather a bad stock market and protect capital when the next bad stock market occurs. So ask yourself, “Am I driving my car (investing) without a seatbelt (downside protection)?”  If you would like assistance in determining how your portfolio may perform in the next market downturn, contact your Advisor or a member of our Wealth Enhancement Group.


Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results. Therefore, no current or prospective client should assume that future performance or any specific investment, investment strategy or product will be profitable.

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