Using Systematic Rules for When to Sell

Systematic investing can feel like a world of its own, and it’s certainly a topic that could warrant a full series in itself. At its core, though, there are two key principles that simplify the decision to sell: time and thresholds.

Time-Based Selling

One of the simplest systematic strategies is to own a stock for a targeted holding period. The length depends on style:

• Momentum investors may hold for just six to eighteen months - this tends to be the timeframe that trends persist for.

• Value investors may hold one to three years - it's long enough for the market to recognise undervaluation and the price to recover.

• Quality-focused strategies might stretch much longer - and even potentially forever - as great businesses can reinvest their profits in themselves and compound their growth.

A systematic approach can be straightforward: once a set period ends, the stock is sold.

The NAPS example

A clear example of this strategy is in our NAPS Portfolio. This portfolio selects the top 20 highest-rated stocks using Stockopedia’s stockranks, with two from each sector, on an annual basis.

At the end of each year, the previous holdings are sold, and a new portfolio is bought. This process repeats annually, creating a disciplined cycle. Over nearly a decade, this method has delivered a 13.2% annualised return, while keeping the selling decision simple and objective.

The benefit of this type of approach is that it reduces emotional attachment to positions. Positions are automatically reset each year to equal weights, ensuring a consistent discipline. It is this discipline that will reduce your losses, naturally balance your portfolio and take the stress out of your decision-making.

Threshold-Based Selling

The other major systematic approach relies on thresholds. These can take several forms:

• Price targets

  : Selling once a stock reaches a predetermined valuation.

• Ranking thresholds

  : Selling when a stock’s ranking score drops below a set level.

• Stop losses

  : Exiting when a stock falls below a certain price level.

The 90/70 Rule

One useful framework is the StockRank 90/70 Rule, based on research by Christoph Reschenhofer. The principle:

• buy shares with a rank of 90 or above

• sell when they fall below 70.

This creates a “sweet spot” where returns are optimised.

For example, Reach PLC can be used as a recent case study. It was purchased at a 90 rank, held through a strong upswing, and sold once it dropped below 70. The fall in ranking was primarily due to rising valuation — a clear threshold being crossed. Once these stocks reached their estimated value, they become less of a ‘Buy’ or ‘Hold’ and more of a ‘Sell’.

Sell when the P/E reverts?

Value investors apply a similar principle with traditional valuation ratios. David Dreman, in “Contrarian Investment Strategies”, for instance, advocated buying very cheap stocks based on low price-to-earnings or low PEG ratios, then selling once they reverted to or slightly above the average.

Once sold, you apply your capital to a new contrarian stock and repeat the process.

The process is systematic and ruthless, designed to remove hesitation. Having a systematic approach to buying stocks automatically tells you when you should sell. Once the threshold has been reached, you simply sell.

Why Rules Work

Rules get rid of indecision. They take emotion out of the process, and bring discipline to selling — often the hardest part of investing. By combining time-based cycles and threshold-based exits, systematic investors create a framework that simplifies selling while still capturing the drivers of quality, value, and momentum.

The power of systematic rules is not limited to fully systematic investors. Even discretionary, thesis-driven investors can benefit from adding rule-based elements.

In our next article, we will cover not only what discretionary investing looks like, but how it can further your skillset in selling well.