Trading Closed-End Funds: Selling
Description
This article is from the A Guide to Closed-End Funds (CEFs).
Trading Closed-End Funds: Selling
Perhaps the hardest part of investing is deciding when to sell. This is especially true in trading when selling must be done during periods of high optimism, especially if you have built large positions in relatively illiquid CEFs.
The basic rule is to sell when the valuations become unfavorable, for example, the discount has moved to some threshold above the normal discount, or some loss-limit has been reached. It usually makes sense to apply a loss-limit, because when some of the markets in which closed-end funds invest in go down, they can go way way down. Some examples:
%Decline from peak to bottom Hong Kong (1970-74) -92% Taiwan (1986-90) -80% Mexico (1978-82) -86% Mexico (in $) (1994-95) -71%
The reverse of the two rules quoted for buying apply here:
- You will almost never find the top at which to sell, the corollary is to average out of the CEF by taking profits.
- There are sure to be funds that stayed put till it became too dangerous to keep the position and soared just after you sell them. The trick again is to diversify so that this happens less often.
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