Page 31 - DIY Investor Magazine - Issue 25

‘IF I CAN BUY IN AT A SENSIBLE PRICE, THESE STOCKS SHOULD PRODUCE ABOVE-AVERAGE RETURNS FOR YEARS TO COME’
Sometimes, it may be that the investor takes the opportunity to lock in a profit if they believe that the stock has achieved an unsustainably high valuation.
Common reasons for selling are:
• You need the money
• The investment case for a company has changed since
you bought in
• The valuation has become too high and your trigger fires
• You are losing sleep because you regret an investment
• The share price has slumped and you’re bounced out by
a stop loss
• Your portfolio has got out of shape and you’re rebalancing
• You’ve seen a better investment opportunity
TAKING PROFITS
If you are fortunate enough to see one of your stocks galloping away, you may be tempted to cash in. However, having got it right, why shouldn’t you keep on being right and benefit as the price keeps going up?’; a nice problem to have, but a problem all the same. In this scenario I take some of my profit and still retain some shares; how much profit you take is up to you but I generally take enough profit to cover my original investment, which then gives me a free ride in the hope for future share price gains.
CLASSIC MISTAKES MADE BY INVESTORS
Although it is tempting to believe that those in the tall building are investing machines, devoid of emotion and inert to psychological biases, that is not the case, and whilst there may be more checks, balances and safeguards than are available to the average DIY investor, the stakes increase exponentially with the addition of a number of noughts to the transaction.
So whether a high-rolling professional investor, or a hobbyist seeking to augment your income in retirement, there are certain behaviors to be aware or avoid:
Don’t be greedy – don’t get carried away when share prices are rising strongly and assume a stock will go up forever; it won’t.
Don’t fall in love with an investment – critically reassess your investments on a regular basis and do so as a dispassionate investor rather than as a groupie.
Don’t succumb to fear – short-term problems can often cause significant price falls if an investor doesn’t have a sufficiently long time horizon. Investors may sell out because they think that the temporary problems mean the shares won’t go back up and this can become a self-fulfilling prophecy if it causes enough investors do follow suit. If prices continue to fall it can cause panic, as other investors assume the problems are worse than they realised; at this point rational, long-term investors can achieve excellent returns by buying during periods of fear with a contrarian mindset.
Don’t panic when markets are falling – when screens turn red and markets crash, investors need to keep calm and ask if the investment case has changed for each company in their portfolio; if nothing has changed, do not panic sell.
Don’t tinker – investors can be tempted to over trade, chasing a ten-bagger or the next big thing, or merely out of a belief that they should be more active; this tinkering around incurs trading costs which can add up over time and rarely improves the performance of a well structured and managed portfolio.
KEEP CALM AND CARRY ON
Stock markets go up and stock markets go down; this is completely normal as they reflect world events, politics, and a myriad of other influences.
I have taught myself to filter out such short term noise in pursuit of my long term objectives; by keeping a watchful, but not obsessive, eye on my portfolio, I know that nothing is completely bent out of shape, and I should never be forced to sell in a panic as either my personal, or market conditions, shapeshift.
However uncomfortable it may seem when you first see the value of your portfolio heading south, investors should not
fear occasional swings in the market; use spells of extremely volatility to reassess your portfolio. As with many aspects of investing, there is no silver bullet; the key is having a disciplined policy on why you buy, how long you hold, and when you sell.
And, as with many aspects of investing, this is a very personal experience – it took me a number of years before I could instinctively feel what was the right decision for me in any given circumstances, and I worked out that I had being doing what I thought I should do, rather than what felt right.
I now find myself acting in a way that feels entirely natural, but is layered onto a methodology that I have become comfortable with over many years; if you can be disciplined over the long-term you can have a better chance of growing your investments and achieving your financial and life goals.
31 DIY Investor Magazine | Sept 2020