In the world of investing, a well-worn adage prevails: it's not about timing the market, but time in the market. This principle suggests that for most investors, particularly those without extensive trading experience, the optimal approach is to commit funds and maintain that position for a minimum of three years, with five years or more being ideal. Financial markets are inherently volatile, fluctuating in response to unforeseen global political events, such as the recent impact of President Trump's Greenland manoeuvres on the FTSE 100, which can cause share prices to yo-yo dramatically.
The Case for Patience in Investing
These market movements often hinge on confidence rather than a company's fundamental performance. While professional investors, major banks, and hedge funds may thrive on short-term market plays, for the average individual, such strategies typically lead to losses. Over extended periods, investments generally appreciate in value, especially when diversified across a range of funds or stocks to mitigate risks from any single underperforming asset.
The conventional wisdom advocates a buy-and-hold strategy, urging investors to disregard market noise and emotional reactions. However, there are instances where cutting losses becomes a prudent decision. The challenge lies in discerning when to persevere and when to exit.
Expert Insights on Selling Decisions
Darius McDermott, managing director of Chelsea Financial Services, notes, "There is no strict rule on when to sell or hold, but in my view, you sell a fund or stock when the narrative changes. If your initial expectations aren't met, it's time to reassess." Jason Hollands, managing director of Bestinvest, observes that many private investors lack a disciplined selling approach. "They often enthusiastically acquire new investments but neglect regular portfolio reviews," he says. "We frequently see portfolios cluttered with over 30 funds and stocks, including formerly popular funds that have cooled off. Excessive diversification can lead to 'di-worsification' if holdings are ignored."
Tom Wait, investment manager at EQ Investors, highlights the psychological difficulty of selling poor investments. "It's crucial to recognise that selling can be a sensible, disciplined choice, not a failure," he advises. Wait recommends evaluating whether you'd invest in the asset today, suggesting that selling is wise if the broader market or sector is strong but your investment consistently disappoints, such as by missing earnings targets repeatedly.
When to Consider Selling an Investment
According to Jason Hollands, several scenarios warrant selling consideration:
- Excessive Valuation: If a stock's price-to-earnings ratio becomes overly high, it risks sharp declines if performance falters. Setting price targets and taking profits to reinvest can be sound practices.
- Management or Strategy Changes: Events like a fund manager's departure, a takeover, or a shift in investment approach necessitate scrutiny of the new team's track record.
- Fund Size Growth: A previously small, high-performing fund that rapidly expands may require reassessment, especially if its success relied on small companies.
- Persistent Underperformance: A prolonged period of poor results relative to the market merits review, though selling solely based on past performance is unwise, as even top managers like Warren Buffett experience downturns.
- Asset Allocation Adjustments: If an investment, such as exposure to US companies, becomes too large a portion of your portfolio, selling or reducing it may rebalance your mix.
Selling isn't solely for losses; Nigel Stockton, chief executive of TrinityBridge, advises considering cashing in when profits reach around 75% of the original investment. "You never know if a winning streak will continue," he says. "It's about realising value, not perfect timing, even if prices keep rising."
Ultimately, a balanced approach combining long-term holding with periodic, disciplined reviews can help investors navigate market volatility and optimise their financial outcomes.
