No question is a stupid one, so whether you want to find out what you need to do to start investing or how the stock market works, don’t be shy, ask ii.
Michael from Rayleigh, Essex asks: I have several funds and shares in my stocks and shares ISA at a current profit level of over 100%. Is there a sensible trigger point where I should sell and cash in, locking in the profits and invest somewhere else, or just hold and hope for even bigger profits going forward?
Keith Bowman (pictured), equity analyst, interactive investor, says: Knowing when to sell is arguably a tougher decision for investors than when to buy.
Unfortunately, as is so often the case, there is no one simple answer which fits all. It’s like walking a tightrope between two stock market sayings - “its never wrong to take a profit” and “run your winners and cut your losers.”
Generally, a good starting point for investors is to remind yourself of your investment objectives. Is it long-term capital growth, to generate income, or a balance of the two? Do the individual holdings continue to meet your objectives? Are you buying volatile investments that could disappoint before they, hopefully, increase in value?
There are other important questions that investors need to ask themselves from time to time. Why do you own this stock or fund? How would you feel if your big profit suddenly turned into a much smaller one or even a loss? The answers to these might influence your exit strategy.
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If a fund you hold consistently lags competitor funds in generating capital growth – then it might be time to switch. If you bought an individual company for its growth prospects but it has subsequently changed its business portfolio – then it could be time to sell and find something more suitable.
Judging each holding on its own merits and how it fits into the broader portfolio is an ongoing consideration. You might want to consider whether any of your funds invest in commodities, or focus on a single emerging market region, like China or India. These funds are typically more adventurous and do experience short-term periods of strong and weak performance.
A change of personal circumstances, such as pending retirement, will also likely trigger a change of focus. This may affect your attitude to risk and prompt a rethink on what’s in your portfolio.
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It’s important to regularly monitor the balance of your portfolio holdings. A clear bias to a particular sector may need addressing, with a part sale and reinvestment into a different sector or topping up of an existing sector. This may have come about through outperformance by a particular stock or fund. If they now form too great a portion of your investment portfolio, it may be time to rebalance.
A perceived change in the economic outlook might also be a reason for investors to make changes, perhaps selling so-called cyclical companies, and buying more defensive investments. Beware though – even professional economists regularly get the timing of this one wrong.
A personal decision
Some people might employ a rule that means they will sell if an asset rises by 20%, 30%, 50% or more. That tactic requires discipline, and many investors fail to stick to their own rules.
Others employ a so-called stop-loss system, a strategy to sell a profitable investment should the price fall 10% from its current price. The stop-loss level can be raised in line with any increase in the value of the asset.
If you do decide to sell, you mustn’t kick yourself if the price continues to rise. It might be worthwhile studying the reasons why you sold and also why the price continued to rise. Ask yourself if there is anything you can learn from your actions which could either confirm or improve your strategy.
We started with some stock market sayings, and I’ll end with another – “when you sell a share leave something in for the next man.”
It’s an odd one, but it refers to the fact that you’ll rarely sell at the top. The thinking is that trying to make a few extra pennies can take time. If the shares fall instead, you may delay a sale which could force a rethink of your plans.
There is no right or wrong time to sell shares, as long as you are comfortable with your rationale for doing so. It is important to regularly check that your portfolio is balanced and fits your investment criteria. And remember, a profit is not a profit until an investment has been sold.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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