There comes a point when you need to take profits; but this is always difficult (if not impossible) to time correctly - selling is much harder than buying.
The reason for the rising prices in London is, of course, the drop in the value of Sterling. One strength of the UK market is that it is international: the FTSE 100 companies are predominantly non-UK-based. And for the DIY Income Investor portfolio, although all of the portfolio holdings are quoted on the London Stock Exchange, they are quite an international bunch.
One reason for this international character is the campaign I had a while ago to diversify out of Sterling, using Exchange Traded Funds (ETFs) covering specific regions around the world. I targeted ETFs that had an attractive yield including either dividend shares or fixed-income bonds.
This strategy did not work quite as intended, as the behaviour of a 'basket' of income-producing securities turned out not to be similar to a single security of the same type (which I had previously based my investing style on). ETFs bundle together a number - sometimes a large number - of similar holdings, based on a particular index or methodology. The components of the ETF can change, making it a different 'animal' to what I was used to.
But these international holdings have proved to be a great hedge against the rapidly plummeting Pound. And consequently the portfolio has soared. As I am now showing significant profits (which I define as 30-40%) on some holdings I have to decide whether it makes sense to sell or 'leave the money on the table'.
Choosing when to sell is difficult: we are hard-wired to cash in early. Watching the 'profit' slowly build up can be excruciating. For that reason I created a behavioural trick - a 'sell' rule which is based on comparing the increase in value (capital gain) with the annual income (either from dividends or bond interest). When this reaches a factor of around 5 (i.e. a gain equivalent to 5 years' worth of income) I will allow myself to consider selling. At the time of sale I often feel 'phew, what a relief' - even though, more often than not, the price keeps rising (and I feel kinda stupid!). Still, overall, the 'sell' rules helps more than it hinders - for me, at least.
I have already begun to take profits. The biggest holding in the DIY Income Investor portfolio was - and still is Anglo Pacific Group (APF) - a British company that specialises in mining royalties. I went in heavy when the share price slumped in Q1 2015, rationalising that the rights to extract raw materials would be valuable in the medium to long term. In fact I bought so much that I broke my diversification rule of not investing more than 5% of the portfolio in a single security.
Fast forward to today and APF is spiking up (at least in Sterling terms). As I hold so much of it I thought it was prudent to begin taking profits - until I get the overall holding down to a more cautious level. This sale netted a 40% gain over a year and a half - plus the dividends. Not bad, except when the price continues to rise and you wish you had waited even longer!
[Sale price: £1.14 - it is now £1.27!]
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.