Ride the market or sell now?
There is an old saying that we learn from our mistakes. But if this is true, why do people continually make the same mistakes believing it will be different next time?
It is not unusual to see portfolios with losses on individual positions of between 50 and 90 percent, especially in times when the market has had significant falls like we experienced in March of this year.
Obviously, large losses on individual stocks can have an extremely negative impact on the overall performance of an investor’s portfolio. When I question investors why they continue to hold these stocks, invariably the argument is that these good stocks will rise back up to their previous value. But this raises two questions: firstly is the stock really a good stock and when will it rise back up to where it was?
When stocks fall heavily in price, the investor is attempting to ride out the market, but is this the best move particularly when they are potentially losing capital and the opportunity to invest their funds in other assets that are rising. What is interesting is that investors will happily ride out a losing stock rather than liquidate it for fear of losing. However, they will gladly sell winning stocks too early for fear of losing the profit they have already made.
Telstra is a perfect example of why the old adage of ‘buy and hold’ is an inefficient strategy and why investors would have been better off selling their shares rather than holding.
By November 2010 Telstra had fallen from its high of $9.20 set back in February 1999 for nearly 12 years into a low of $2.55. It then rose up to $6.74 by February 2015 only to fall back down to $2.60 by June 2018. Yet people continued to hold onto Telstra in the hope it would get back to its previous highs.
This week I reviewed the top 20 stocks in regards to how often they closed higher than they opened for the year. And yes, you guessed right, Telstra was not good on that front, as it only closed higher than it opened for the year 50 percent of the time.
If we look at the last six years, Telstra has closed lower than it opened in five of those years, yet people held onto it in the hope of making money.
The goal to investing wisely is to always preserve capital, as this in itself would improve the portfolio performance of the majority of Australians holding stocks, which can be achieved by simply applying an exit strategy.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au