Portfolio Dilemma: should I sell my winners?

An ii Community member asks: Which holdings should I sell (best gain or worst gain)? And when?

(ii Community is a social trading network to connect with investors, talk about your investments and see how your portfolio compares to others) 

Choosing to make an investment can often feel like an easy thing. You feel excited about the prospects for a given stock or fund – or feel it’s unloved and undervalued – and take the plunge.

But given that we get can easily get emotionally attached to existing holdings, choosing when to sell can be much trickier.

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This particular conundrum can apply in very different circumstances. 

We recently tackled a question about when to sell a struggling investment, but it’s also hard to know when to take profits on a winner.

In the case of this question, the individual seemingly has a number of holdings that have made gains and is unsure of what to sell, or lighten up on.

As is often the case in this series of articles, there’s no simple answer and your choice will depend on your circumstances and preferences. But, as ever, a few useful principles do apply.

Would you buy it again?

A useful question to ask when wondering whether to stick with an investment, be it performing well or badly, is whether you would buy it afresh today. 

If the answer is “yes” then you may want to stick with a strong performer, even if you do want to take some profits in order to limit the size of your position.

Having said that, we run into two conflicting schools of thought here. Some investors doggedly believe in the idea of running their winners and feel that it can be foolhardy to sell your “best” holdings.

As a famous quote attributed to renowned fund manager Peter Lynch goes, selling winners and recycling extra cash into struggling holdings can be akin to “pruning the roses to feed the weeds”.

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But there is another argument in favour of taking some profits on your best performers, and that relates to concentration risk and portfolio composition. 

If, for argument’s sake, a strong-performing stock comes to represent 20% of your portfolio, the stock-specific risk you face is substantial.

In such a situation, you need to know the company well, believe in its prospects, and be comfortable with significant volatility in your portfolio. 

But also remember that companies can have unexpected problems or pieces of bad news, meaning even the most thorough and diligent investor can run into problems with a given holding.

A sensible but unglamorous approach may therefore be to decide how big a position size you are comfortable with, and to rebalance your portfolio perhaps every year or after major price moves.

This might feel like “feeding the weeds” but it can involve taking some gains on the best performers and putting some cash into your stragglers – provided you still believe in the case for holding them.

This approach could involve taking profits on a number of holdings that have made gains, removing the need for you to decide whether to sell the holdings with the biggest gains or those with smaller wins.

As is often the case, some useful practices can help here. It makes sense to be diversified (by sector and geography), to rebalance and to invest regularly to help you offset the ups and downs of markets.

Although asking yourself which winners you would rather sell might help sharpen your focus on which holdings have the greatest appeal.

If you have a question you’d like to be considered in our Portfolio Dilemma series, we’d love to hear from you. Please contact: editorial@ii.co.uk