Cut your losses short and let your profits run

Published in the Daily Telegraph, April 2014 by Dale Gillham

The old saying to “sell in May and go away” used to mean your broker was getting ready to go on holidays. But what does it mean today?

The last few months in the financial year now means I often have investors telling me about emails from brokers or advisers reminding them to sell out of underperforming shares to offset their losses against gains, and or re-weight portfolios they see as over or underweight in some stocks.

In my opinion, this old way of thinking is teaching investors bad habits and is only a promotion by some in the financial industry who stand to profit from your decisions.

The problem this selling of poor performing shares to offset profitable ones creates is that you start to believe that come tax time you can sell your mistakes.

While this might address the loss, I believe this makes investors lazy. 

The point I want to make is that portfolio risk management should occur throughout the year if your risk becomes unacceptable.

Selling a share that has suffered a 30 per cent, 40 per cent or 50 per cent loss shows poor money management skills that should be addressed, and selling profitable shares so as to offset tax often makes very little financial sense. 

The same applies to selling down profitable shares because they have become “overweight” and buying more poor performing ones because they are “underweight”.

A mantra I’ve lived by is cut losses short and let profits run. 

After all, if you lose 50 per cent you have to make 100 per cent to break even. I can’t fathom why anyone would sell something that was making them money to buy more of something that was not.

Accepting the above solutions to portfolio management means there is an underlying problem being your investment approach.

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