Portfolio Management: When to Sell Part 1

If asked, I generally describe myself as a ‘buy and hold’ investor. The buying bit is mostly easy – I enjoy looking for good quality or undervalued assets and acquiring them. The ‘holding’ bit is where it all starts to get a bit tricky.

I’m fairly averse to selling assets. The amount of work that goes into analysing and making a buy decision is often enough to see me through most rough patches in confidence and performance. Having said that, last year, I was much more of a trader – I had much higher turnover in my portfolio than I realised and as a result I want to be a bit more considered about when I sell and under what circumstances.

Generally, I don’t believe inactivity in a portfolio to be a bad thing. I honestly believe that swapping companies willy-nilly is just a recipe for making analytical mistakes. If you want to own the top 10-15% of companies in the world then once you’ve acquired them, you’re reducing the quality of your portfolio by continuing to add or remove names. These global leaders don’t change that frequently – so why should your portfolio?

I also encourage investors to consider the costs involved with trading. The more you trade, the more buying and selling fees you incur. You’ll pay more tax (especially outside of a tax-sheltered account such as an ISA). You’ll also incur mental costs – are you really prepared for the pressures of constantly turning over your portfolio? Up 5% today, down 5% tomorrow, watching every tick of the market with bated breath.

In my opinion, it’s essential to minimise these costs. So much activity in the markets is totally outside of our control (for that matter, so much in life is) that keeping a cool head and controlling what we can is essential. I’m a huge fan of investors such as Nick Train and Warren Buffet who have extremely low portfolio turnover. Once they’ve selected a company to add to the portfolio, they hold them for years, if not decades.

As long-time readers of my blog will know, I’m a big fan of income investing, which in a nutshell involves acquiring assets that produce a regular income. As such, when an investment is going through a rocky patch, the income it produces offsets the anxiety of holding a volatile position and makes it more obviously reward to ‘hold for the long-term’. I admit to liking progress on a regular basis. My fiancé will attest to the number of times I’ve talked about my ‘six monthly reviews’ where I set new goals and consider progress earned. If I cannot see the progress I’m expecting and cannot see any value in continuing with something, I’ll generally stop.

It sounds simple, but one of my goals for 2020 has been to consider more goals over a longer time frame. Although I’m not a fan of people who sigh wistfully and say “some things take time” when asked why they’ve not achieved something, it is true; everything takes some amount of time, and some things more than others.

Even acknowledging this, there are sometimes when selling a company is just the right thing to do. One of the most obvious is if the price-to-earnings (p/e) ratio gets absurdly high. This isn’t always an exact science – it’s not like I only buy at a p/e below 10 and only sell over 20. As a general rule of thumb, the higher the number, the more the company is expected to grow. As such, keeping an eye on high p/e ratios is essential – is that future growth likely to happen or is the market simply bidding the price up on shaky foundations?

Another element I take into consideration is the dividend yield. Personally, I won’t invest in any company with a yield of less than 3% at the outset. Over time, I would expect the company to grow earnings, profits and as such, its ability to pay a growing stream of dividends. If this is the case, the percentage yield should hopefully rise if not at least remain stable over time. On the odd occasion I purchase a company on a very inflated yield of say 7 or 8% (perhaps due to a temporary collapse in the price), I would expect the yield to fall over time as the share price rebounds and the yield declines.

Of course, if the price increase outstrips the company’s ability to grow the dividend, the yield may decline lower than 3%. At 2.5% it enters my ‘watch list’ for sales, at 1.5% it is flashing red, and if I hadn’t sold it on a yield of less than 1% then it must be a truly exceptional business (I don’t think I’ve ever held a company on a yield of less than 1%).

Ultimately, the decision to sell is one which I try to take in light of both my overall portfolio (will it weaken or strengthen it?) and in consideration of other options for the capital (if I’m not invested in this, then what should I be invested in that is better?).


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