Your shares have tumbled: So do you sell – or buy even more?

Knowing when to call time on a failing investment is one of the hardest decisions an investor will face. Selling at a loss means admitting you made a mistake, which is difficult at the best of times – not least when you have money riding on it. 

Investors are often haunted by the fear that an asset they owned will recover in value as soon as they sell, leaving them racked with regret. 

And that can happen. Markets plunged in March last year as nervous investors sold out due to fears over the impact of the global pandemic. 

Decision time: Investors who sold out when markets were in freefall last year would have missed out on an epic recovery

Now 18 months later, the value of the UK’s top 250 listed companies is hitting record highs this week. Investors who sold out when markets were in freefall would have missed out on an epic recovery. 

So how do you decide the right time to sell? 

One trick is to write down your reasons for buying an investment at the moment you make the purchase. 

You can revisit this record regularly to check you are still on track. If the investment is diverging from that goal, you could consider selling. 

If it is still on track, you may want to sit tight, even if its value has fallen since you bought it. Simon Evan-Cook, an independent fund analyst, believes having a well thought through strategy from the start should enable you to act quickly if you spot things aren’t going to plan. 

Why is selling so much harder than buying?

Private and professional investors alike have a tendency to hold on to disappointing investments for too long in the hope they might recover. 

David Coombs, head of multi-asset investments at Rathbones, says there is much more emotion involved in selling than buying. ‘People always feel the pain of a loss more than the pleasure of a gain,’ he explains.

Mark Slater, manager of the Slater Growth fund, believes it can be hard to face up to the truth. ‘There’s no doubt that most people take profits too early,’ he adds. 

‘And when they have a loss, they hate admitting they are wrong and would much rather hope it comes right. But that is the road to hell. It is much better to bite the bullet and take the loss.’ 

Work out why the investment is failing 

There are a number of reasons why an investment can disappoint. 

It may be one systemic problem, such as a management or accounting issue. There could also be several factors at play. 

Evan-Cook advises investors to be wary where a problem emerges at a company; it could be a sign that there are others. He points to the wise words of Angus Tulloch, a retired fund manager who made his name at Stewart Investors, who warned: ‘There is always more than one cockroach in the cupboard.’ Slater believes that once you have worked out what is driving the fall in value, you must consider whether it undermines your ‘buy case’ – the reason that you bought it in the first place. 

But, if it doesn’t, Slater suggests holding on. This may be the case if the issue is temporary and can be resolved. An investment can also disappoint because you bought in at the wrong price. A company or fund may be perfectly sound, but if you bought in at a high price it can be hard to make a return when you sell. 

You may want to have a subs bench of other investment ideas ready, so that if you need to sell, you can seamlessly shift the money into something you feel more positive about. Alternatively, you could simply sell and hold out until you have time to research other opportunities or add to your existing holdings.

Try not to panic when a price falls… 

There are some reasons that an investment can fall in value that, however, don’t spell long-term disaster. This can happen if a fund or share has moved in line with the market and there is a clear reason why the market is down. 

In this case, Evan-Cook suggests sitting tight. He cites the markets in March last year as a prime example. ‘A lot of people sold then. But, if you panicked and sold at that point, you would have locked in some nasty losses,’ he says. 

Another reason a fund may underperform is that the manager follows a certain style or theme that is currently out of fashion. If you understand why that is and expect performance to bounce back, you may wish to be patient. 

…but don’t put off making a decision 

Dean Cheeseman is a multi-asset portfolio manager at Janus Henderson Investors. He says it’s easy to delay making a decision, but this can make things worse. ‘It is very easy for inertia to take over and to put your head under the duvet and hope things will get better,’ he says. 

‘One rule of thumb is to stand back, be as objective as you can and ask: if you were making the same investment tomorrow, would you be happy to commit fresh money? If the answer is ‘no’, it is time to sell.’ 

He adds that the worst thing an investor can do is to create a new narrative or reason for holding a stock or fund once performance starts to deteriorate. 

Coombs goes one step further in his strategy. 

If an investment in his portfolio falls in value, he either has to buy more of it – or sell the lot. ‘This takes a lot of the emotion out of the decision,’ says Coombs. 

‘If you know that you are going to put more money in, you have got to be really convinced that the fall is short-term.’

And finally, don’t forget about fees

Remember that some investing platforms charge customers for buying and selling shares. This is not necessarily a reason to put off selling if you have lost conviction in a holding. 

However, it is worth buying with an expectation that you will hold for the long term as the cost of chopping and changing can quickly add up. 

If you find that you are someone who buys and sells shares frequently, then consider investing through a platform with low fees for doing so. 

Fees tend to be less common for buying and selling funds.

This post first appeared on Dailymail.co.uk