There’s a well worn saying when it comes to investing – it’s not timing the market, it’s time in the market.
This means that, unless you’re an experienced trader, it’s a far better plan to invest your money and then leave it be for a minimum of three years and ideally five, if not longer.
Markets are volatile and rise and fall whenever something unexpected happens in world politics – just look at the effect that President Trump’s Greenland shenanigans has had on the FTSE 100.
It’s like a yoyo.
These movements are everything to do with confidence and, often, big swings in a company’s share price have nothing to do with whether it’s doing well or not.
Professional investors, big global banks with trading floors and hedge funds thrive on ‘playing’ the market in the very short term.
For the rest of us, that’s almost certainly a hiding to nothing.
Over the long term, the value of investments tends to rise – particularly if you have a diversified portfolio of funds or stocks to protect you from one faltering.
The received wisdom is to buy and hold, ignore market movements and stick it out. Leave emotion at the door.
This said, there are times when cutting your losses is the sensible thing to do.
How do you tell when to hold your nerve and when to admit defeat?
Darius McDermott, managing director of Chelsea Financial Services, says: ‘There is no rule on when to sell or hold but in my mind you sell a fund or stock when the story changes.
‘If you had an expectation and that’s not met then you should ask questions.’
Jason Hollands, managing director of Bestinvest, says in his experience, too few investors have a ‘sell discipline’.
‘Individual private investors are typically inspired by new investment ideas but are often less rigorous in periodically reviewing their existing portfolios and making changes,’ he says.
‘We frequently see examples of investors with sprawling collections of well over 30 funds and stocks, purchased over many years. You can spot previously hot or best-selling funds that have since gone off the boil.
‘Diversification is generally a good thing but too many holdings, especially neglected ones, can lead to di-worsification.’
Tom Wait, investment manager at EQ Investors, says the psychological barrier to selling a poor investment is hard to overcome.
‘However, it is important to recognise that selling such an investment can be a sensible and disciplined decision, not a failure,’ he says.
Wait recommends weighing up whether you’d invest in the company or fund today.
‘Selling is often wise if the market or sector is strong but your investment isn’t and is suffering from consistent disappointments, such as repeatedly missing earnings targets,’ he adds.
Selling isn’t just a decision to be taken when investments go wrong.
Nigel Stockton, chief executive of TrinityBridge, says when a company is doing well it’s worth thinking about cashing in.
‘The moment you make a 75% profit on your original investment, that’s when to consider whether it’s time to sell,’ he says.
‘You never know whether a winning streak is going to continue and sometimes it’s worth cashing in – even if you find that the share price keeps going up. It’s not about timing, more about realising value.’
When to consider selling an investment
According to Jason Hollands, managing director of Bestinvest
When a stock’s valuation has become excessive
The most widely used measure is price/earnings ratio. Excessively high ratios increase the risk of steep losses if the stock disappoints at some point. Taking profits on successful holdings and reinvesting into new opportunities is a sound discipline. If you are going to invest in individual shares, setting a price target is a good move.
A change of fund manager or significant change in investment approach
The latter can happen following the sale or takeover of a fund management business, as well as a resignation or retirement of a key decision maker. You then need to scrutinise whether the new individual or team have a credible track of their own to bring to the table.
Fund size can matter
If you bought a high performing fund when it was relatively modest in size and it rapidly balloons, this can require a reassessment, especially where past success was built on accessing relatively small companies.
Performance
A prolonged run of poor performance relative to the market it invests in, is certainly a case for considering whether to ditch a fund. However, it would be wrong to sell based on past performance. Even the best fund managers – including the legendary Warren Buffet – have and will experience weak patches in their careers and no investment approach will work well in every market environment.
Asset allocation
The technical name for how you choose to divide your overall mix of investments up between different assets, regions, industries or approaches to investing – is another reason you may need to sell a holding. For example, if exposure to US companies has become too big a proportion of your overall investment pie than you are comfortable with you might want to sell or reduce a holding.
