I find it very disconcerting when investing platitudes contradict each other. Because it points to an inherent uncertainty and unpredictability that makes up our existence. And goes to remind me that investing decisions are not easy.
Let me present you with two: You never go broke taking a profit. Let your winners run.
Let your winners run
Holly Black, senior editor at Morningstar UK, documented her struggle with this. I love the way she expressed it: The decision of how long to keep running a winner is a delightful problem for any investor.
Here’s how she tackled it, in Holly’s own words.
This is a dilemma I’ve faced thrice since 2013.
I’ve owned funds which more than doubled my money and have had to decide what to do about it. Since I only check my own portfolio a few times a year, each time this has happened has come as something as a shock.
The first time it happened with a tech fund, and I did end up entirely offloading the holding over a period of three months, figuring that the rally just couldn’t go on. I bought back into the fund a year later and it is still performing well. What did that teach me? Not to get spooked out of my own conviction – I still believed in the fund, the theme and the manager, but I let fear get the better of me.
In the two other instances, I booked profits and reduced the holding back down to its original proportion of my portfolio, putting the proceeds into other funds. Both of those funds – along with the tech fund – remain in my portfolio.
I am running my winners. And I am still battling the uneasy suspicion that it could all go belly-up at any given moment.
That’s the thing they don’t tell you about investing: it can cause you disquiet even when you’re doing well.
How do I deal with that? I ignore the numbers and the market noise and I ask myself two simple questions: has anything actually fundamentally changed, and do I still have faith in this fund?
You never go broke taking a profit
I agree with Holly, it is a delightful problem to have. One that I encountered this year too.
On March 13, 2020, I invested a substantial amount in an open-ended fund that invested in equities across the global. Towards the end of August, I checked my portfolio. To my absolute surprise, the amount I invested returned an eye-popping 72%. The absolute return of 72% was for a period of less than 6 months.
I struggled to make this call. It was a good investment. My long-term outlook had not changed. I was still an ardent believer of global diversification. There was no change in the fund managers or their strategy or the ownership of the asset management firm.
So, what made me sell?
I would not sell an equity investment if the market tanked. I would refrain from converting a paper loss into a reality. But it would be foolhardy to not convert a phenomenal profit into an actual one. The reason being, I honestly believed this was just good old-fashion dumb luck and could not envisage such a winning streak again.
This was serendipity. March 2020 saw one of the most dramatic stock market crashes in history. Fortunately, I did have the cash to invest during the proverbial and ghastly “blood in the street” market. Most surprisingly, a stupendous market rally followed. The classic buy low and sell high played out brilliantly.
My options were:
- Sell the entire investment.
- Leave the investment as it is.
- Pull out only the gain.
- Sell in stages. If the market goes up, continue to sell at a higher rate. If it dips, I anyway booked some profit.
- Check the asset allocation and sell based on how much of my equity portfolio should be in global stocks.
In retrospect, it would have been logical to consider the last option. I just went with the one I felt most comfortable with, and the most convenient, though not necessarily the best.
Extreme winners
The problem is never with investments that do well, but those that do extremely well. The ones that make you go “Pinch me, I’m dreaming!”. It is a complex call that must be viewed in conjunction with your portfolio and your temperament.
I never look back once I sell. I don’t look back in remorse or glee. I just walk away. But I knew deep down that I would regret not booking profits on this win. Like I mentioned above, it was probably not the best option and I did let emotion play a role. Eventually, facing up to this question clinched the deal: Would selling move me closer to my long-term goal? The answer was a resounding yes.
You have to be honest and ask yourself how a decision would sit with you. There is no one-size-fits-all. There never is when it comes to finances. What suits me may not suit you. That does not mean I am right and you are wrong. It just means that we are human.
