I’ve been an investment advisor for more than 30 years now. I grew up following the stock market from the age of nine when my mother was taking the Canadian Securities Course to become one. I have all this experience, yet I am still learning. I tend to be a cautious investor, but can be adventurous at times.
How does this translate into the advice I give my clients? You’ve probably heard about dollar-cost averaging. It is when you buy an investment and periodically add to that investment over time. You can set scheduled and predefined periods, such as monthly, when you buy more shares or units of the investment no matter the price or price trend. This way, you are not concerned about trying to “time” the market to get a lower price. It takes that totally out of the equation of the investment.
If it works for buying, why not do it for selling? There is a slight difference when selling though; it is not about ignoring timing, but ignoring greed.
I know there is the saying: “Ride the winners.” I also know I’m going to get a lot of pushback by talking about this strategy, but in most instances, it has worked for me and my clients.
If an investment has done “well” (how ever you define that is subjective), then sell part. This is where the greed comes into play. As an investor it is difficult to ignore that aspect. It helps when you buy to have a realistic value at which you would sell. Not sell all – but some. Is it when the stock has gained 20 per cent, 50 per cent, 100 per cent? And what constitutes “part” is going to vary from person to person. However much it is, hold on to the rest and continue to reap the benefits of that investment. If the investment starts to falter – perhaps because of a change in management, competition, or sector performance – then sell it all.
Here is a simplistic description of what I am talking about. I’m going to use the example of a stock as the investment, but it can also apply to mutual funds, bonds, etc. It can’t be applied to something like real estate.
Basically, you have decided you want to own $50,000 of a stock. It represents less than 10 per cent of your total portfolio. (That is the upper proportion that most prudent investors set themselves.) I also try to limit the number of stocks to 20 to 25. Above that, the law of diminishing returns kicks in. This “law” is that there is not a significant beneficial gain by owning more stocks.
The stock is reaching new highs or lows, but you like the company and you think it is a good investment. You buy $20,000-$25,000 worth. You watch the stock and if it goes down in price, you can choose to buy more. If it goes up and you are making money, you can choose to buy more. Let’s say that your total investment has reached the $50,000 you targeted after making multiple purchases. The stock now has risen and is now worth $80,000. I would skim off part of the profit; the amount that I would sell would vary depending on the situation at the time. Sometimes I would sell $30,000 to take the winnings. Sometimes I would sell $40,000 or maybe $50,000 – which is my original capital – and the remaining portion is from the market gains.
My point is that if the investment is still worthwhile holding, you may want to hedge your bets and take some of the gains when the getting is good. Skimming off gains periodically in order to rebalance your portfolio will also help to ensure you don’t have one investment that is so large it makes your portfolio vulnerable to volatility in that stock price. Sticking to that approach won’t make you hesitant to sell a stock because there is a large capital gain and you don’t want the tax hit; a commonly held rule of investing is that you don’t let the tax decision rule the investment decision. The recent proposed changes of capital gains taxation will not have a significant impact with this strategy because you have been taking some gains over the course of several years.
Skimming off profits also allows you to use that money to make other investments and repeat the process.
Finally, remember that there is an “art” to investing. Selling is not all or nothing. And as much as we would like it to be, no approach to investing is ever perfect.
Nancy Woods is portfolio manager and senior investment adviser with RBC Dominion Securities Inc. Send your questions to [email protected]
