|Now, what does this button do..?|
I've just sold a holding in my DIY Income Investor portfolio and realised a 29% capital gain over less than one year - enough to pay for a family summer holiday. 'Not bad' you might say - but was I 'right' to sell?
The typical advice given to new investors is 'hold your winners and sell your losers'; but presumably that can't be the whole story (or you would never realise your capital gains). I'm afraid that my own approach does not really follow this advice - although it doesn't ignore it completely.
The basis for this advice is actually quite subtle, because it is based on our innate behavioural biases (or our 'monkey brain', as I call it). Academic research shows that - sure enough - we do tend to sell our winners too early and sell our losers too late: it is called the disposition effect and seems to be caused by an aversion to loss realisation. One observed manifestation is that gamblers who are losing tend to take greater risks than they would normally.
Human beings are a bundle of behavioural biases, which over hundreds of generations have helped our ancestors to survive. These biases are quite powerful, mainly because they are subconscious. Even when we are aware of them, is it actually quite uncomfortable to resist them.
So, over the last few years, I have developed a couple of simple investing rules to help me deal with my biases:
- Rule 1: Buy only securities that provide an attractive, sustainable income yield
- Rule 2: If it is a 'winner', delay selling until the capital gain is more than five times the current/forecast annual income
- Rule 3: If it is a 'loser', delay selling until the capital loss is more than ten times the current/forecast annual income
- Rule 4: If it is a 'winner' or a 'loser', sell if the yield is no longer attractive
- Rule 5: Use your judgement in the interpretation of the 'rules'
After that brief digression, here are the details of today's sale. It is my last remaining tranche of Tullett Prebon (TLPR), a 'financial intermediary' which has sparked back into life in the last week or so (if I had more interest I would try to find out why...). I have been in and out of TLPR over the last couple of years, making a nice return on my efforts. The price rise hit my '5 times annual earnings' rule and I have sold. With an unexciting yield of 4.5% - in a tricky market - it is likely to be off my radar for a while.
Now, which ETF looks interesting...?
[Sale price £3.71]
PS As I write this, there is sustained interest in the market to TLPR. Have I sold too soon? (And the monkey brain kicks in again...)
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.