Choosing the right investment is hard work. You need to read up on the company, look at the accounts and set the activity against what you know (or think you know) about the wider market. However, I find that selling is even harder than buying.
Share prices go down as well as up. What should you do when this happens? Should you sell? If so when? Here's what I do - but be aware that it doesn't work all the time!
When share (or bond) prices go up, selling - at a profit to the purchase price - is psychologically easy. As the saying goes - "nobody ever went bust taking a profit". But there is still a catch: what if you sell too early! The higher the price goes, the more you are (theoretically) leaving on the table, money that might be snatched away with a sudden price downturn. The temptation is to grab the profit - usually too early.
When the reverse happens - and the share (or bond) price falls you feel depressed because you bought the wrong thing and didn't see the downturn coming. Every time you look at the price it highlights what a 'bad' investor you are. In this case the temptation is to get rid of it too early or to put off getting rid of it, turning the 'paper' loss into a real 'cash' loss.
What I try to do with the DIY Income Investor approach is have a couple of simple rules that help me overcome my hard-wired monkey-brain behaviour.
Let me start with possibly the most illogical part of the approach. Many investment books recommend that you forget the purchase price: your investment is a 'sunk' cost and should not influence your future investment decisions. That's probably sound advice - but it's not what I do.
Instead, I try to go along with the wired-in behavioural biases, but control them a little. So here are the rules:
- if the yield falls significantly below the portfolio average, consider selling (this is an income-oriented approach, after all)
- if you have a capital gain, no problem
- if you have a capital loss, consider whether a share price recovery is likely in the medium term
- if the share/bond price rises, wait until the capital gain reaches 5 times the annual income - then sell
- if the share/bond price falls, generally continue to hold but carry out a serious review when the capital loss reaches 10 time the annual income; unless there is a good reason to expect a recovery, sell and take the loss
Having said all that brings me to my current problem share: Huntsworth (LSE:HNT) which is a loser that I have held for a while. The share price has been recovering recently but the yield has fallen to around 4%, which is my yield-based 'sell' signal. The latest Interim Results for the six months to 30 June 2016 are not reassuring at all - whenever a company trumpets 'headline' profit or downplays 'exceptional items', you know it is time to go.
So I'm heading for the exit - but I'll wait a little and hopefully I'll come out nearly even. It may be 'wrong' to think in those terms - but it would feel good to get my money back.
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.