Does your Financial Advisor Have a Sell Strategy? (and Why You Need to Find Out)

Financial advisor sell strategy

You hire a financial advisor to handle your investments, but what happens when the market transitions to a new phase?  Stocks naturally cycle between bull markets (where most stocks rise in value over time) and bear markets (where most stocks drop or stay flat).  That’s an entirely natural process.  It’s also when you find out if your wealth manager had a strategy in place for selling and taking profits on your investments…or not.

Unfortunately, our experience is not all financial advisors have a sell strategy in place and simply focus on buying investments. But when and how you sell is critical too.  If your advisor doesn’t have a selling system, they are potentially leaving your money at risk.

People often ask a financial advisor how they would invest their money, how they communicate, and what types of clients they help.  However, most people don’t know to ask about a sell strategy.  But this is a critical question, and it’s better to ask that question now before you undergo large losses and find out no system was in place.

Why Do You Need a Sell Strategy in the First Place?

Before you ask, it’s helpful to understand a bit more about potential strategies yourself.

You’ve probably heard the term “paper profits.”  As you’ve probably seen, markets fluctuate all of the time.  Any investment profits you see in your account are not a sure thing.

It’s only when you sell an investment do you turn that paper profit into reality.

What Types of Sell Strategies are used in Wealth Management?

Because markets are complex and constantly changing, there’s no “one” best approach to investing or selling investments.  What is important is that your financial advisor has a philosophy and system that is well-reasoned and time-tested.  And that they use it with discipline.

That keeps emotions out of investing.  That way, decisions about your money are handled in a prudent, reasoned manner and are not the result of an emotional reaction to news or a market drop.

Examples of Sell Strategies

Here’s a few examples of strategies that you might find out there.

Example 1:  Valuation-Based Targets

The valuation-based sell strategy focuses on finding stocks that are a bargain and waiting to sell until they reach their valuation-based target.  Your advisor may use various baseline measures, including the price-to-earnings ratio or price-to-sales ratio.

The goal is to buy a stock when undervalued and sell it when it hits its target value.

Often, markets “overshoot” targets as investor enthusiasm heightens, so this approach may have you miss a final jump where the stock is driven to what seems to be an overvalued level.  But this more disciplined approach can help you hit more consistent “singles” and “double” that can still help you achieve your goals with less risk of significant losses.

Or a more savvy investment manager may then sell parts of your position so you can lock in some profits and let a final slice of the holding ride for those higher prices which may or may not materialize.

Example 2:  Growth and Profitability Targets

Another selling strategy is based entirely on a company’s fundamentals, which simply means its financial condition.  So decisions are made based on the company’s balance sheet or income statement. Basically, you’re keeping a stock while the company is profitable and growing and selling it when performance falls off.

This doesn’t mean the company has to fail, but if it performs worse than when you invested initially, you may want to sell.

Some financial advisors focus on dividend-paying stocks, watching the company’s financials. If company performance deteriorates, that may lead to a dividend cut.  Selling would allow them to take profits and move that money to another investment that may fare better going forward.

Example 3:  Technical Targets

Some financial advisors emphasize technical analysis.  That means they trust that most information is known, so they believe it’s safest to “follow the money.”  So they base investment decisions on price action.  They will typically set a target price they anticipate for a stock or fund.

When the stock hits that level, it triggers a full or partial sale.  Or if the fund or stock goes the other way and drops, the advisor may sell to cut losses quickly, so you preserve your capital.

The Biggest Problem:  No Formal Sell Strategy

These are all very simplistic examples.  Most serious investment managers may use a combination or hybrid of these general strategies.

Here’s the key:  you want to make sure your advisor actually has a selling strategy.  Many don’t.

That lack of proactive investment strategy and risk management can create problems for you.  Many people don’t see this until the market drops, and they are just told to “wait it out.”

That’s why it’s critical to be very direct with your advisor or a potential advisor and ask them what their strategy is.

If what you hear isn’t a well-articulated, easy to describe system, you may be at risk.

In that case, it’s wise to get a second opinion.  Most quality financial advisors will provide these to you at no cost.  That can help you determine what your best course of action is going forward.



Looking for a firm that’s serious about better investment advice?  At Arroyo Investment Group, we’re a GIPS® compliant, fee-only financial advisor focused on helping you improve your financial future.  Our track record shows our commitment to transparency and results.   Contact us today for a no-pressure complimentary second opinion on your investments and financial plan.