Saturday, 13 December 2014

Knowing When to Sell

This week I flexed my developing investing muscles in a new direction. I forced myself to sell something that was doing very well and it was much harder than I expected.

My reasoning process was sound (I think), the fund (Axa Framlington Biotech) has risen over 20% in the 8 weeks I have held it and I can't see it continuing to rise steeply for much longer (it actually dropped 1.66% the day after I sold). Even if it does continue to gain I had definitely started to feel that it was time to take some profit so I sold £500 worth, which was about the amount my investment had gained since I bought it. However, my emotions played havoc with my common sense in a "But what if you sell and it goes up more - you'll be sorry then won't you?" kind of way which was unforeseen and I didn't like. It smacked too much of unreasoning greed. I steadfastly refused to listen to my inner "kid in a sweetie shop" and pressed "Sell". For this reason I will consider this a successful sale even if the finances don't turn out to maximum advantage, because I've now proved to myself that I am very aware of the part emotions play in investing and I am capable of overriding them. I felt the greed and did it anyway.

The downturn in October actually caused me far less angst, maybe because hanging on when things are dropping is far easier than deciding when to sell when things are going up. Inactivity is always easier than action (or so I find anyway). Selling something that has been more or less standing still (as my CIS UK Growth fund has been doing for the last year or so) was also easy to do. But giving up something that is rising steeply (surely the time to do just that?) was a different matter altogether. I almost (but not quite :-)) hope I don't have to do it too often.

In all the reading I have done as a novice investor, the subject of when to sell is one on which I haven't actually found a great deal of help. But we all have to do it don't we? No matter how good we are at the long-term "buy and hold" strategy at some point we are all going to need to take the money out. Steep growth (i.e .growth at a high rate over a short period of time) will surely be mirrored by steep falls. If this averages out to excellent long term growth does this mean that the best strategy is still always buy and hold, even though it must also depend on when you want to realise the profit? What is the best way to manage very volatile funds/markets?

This is something of a testing time for me as I am pretty new to investing and I had been congratulating myself that I had weathered the (admittedly somewhat modest) downturns in my riskier funds without feeling too much pain. However I wasn't prepared for this side of the volatility coin. I've only been watching and actively managing my investments since March and haven't seen anything much in the way of gains so the way this particular fund has behaved has taken me by surprise.  I've realised that I didn't (and still don't) have a strategy for dealing with this situation.

My sale this week was actually more a test of resolve over emotion than a move dictated by financial planning and although I still believe I did the right thing, I would like to be more sure and have the reasoning to back it up. As ever I'm probably searching for a non-existent perfect recipe, but any tips, or links to reading on this, would be very welcome.


  1. Well done Cerridwen! The sale was a decision you made yourself and you made a profit, so I reckon the right one! Imagine if you'd been forced to sell and the price was low!?

    I was in a similar situation just after I read the Tim Hale book and I wanted to change my allocations - it was tempting to sell the funds that weren't doing well and hang onto the ones that were on the rise, showing 15-18% gains, in the hope that they would do even better. But what if they didn't? So I sold those ones for a profit but it wasn't easy at all. Even though it made sense, I worried that I'd made the wrong decision but now I think it's the right one.

    Did you reinvest the money you got from the sale or did it go towards Christmas shopping? :-)

    1. Hi weenie, thanks for the reassurance. I'm glad I'm not the only one who has a bit of trouble taking profit. :-)

      I will be reinvesting the money when I've decided where to put it, probably as part of regular monthly subscription with Interactive Investor on the 23rd of the month - that way I only pay £1.50 per trade (most of which will actually come out of my commission credit).

  2. Hi Cerridwen

    Conventional wisdom is to ride your winners and cut your losses, difficult to do and something I should have don with Tesco, if not on their first drop, then on the second, instead waited for the third and fourth drops, and now share prices is less than half where they were at the beginning, and dividend been cut. All in all a salutary lesson.

    It is also surprising how some companies always seem to be "too expensive to buy", but when you look again some time later they have gone up more, this happened with Next who I first thought were too expensive at £15 each, and again at £27, and again at £50 and still seem too expensive at their current price as surely they cant go up any more, can they?

    The real answer is that no-one can predict what may happen, and trying to time the market is impossible.

    Having said all that, it still feels good when you make a profit!

    Best Wishes
    FI UK

  3. Thanks FI UK. I know it is probably a mistake to try to time the market but it is very tempting at times.

    I am struggling with a similar "value" problem myself at the moment. My long term plan to build a more balanced asset allocation has been telling me to buy a US tracker for some time, but I just can't bring myself to do it when the prices are so high. I keep waiting and waiting for a dip but the index keeps going up and up. So much for sticking to my plan :-)