Get Rich Slowly: when to fold, raise or go all-in?

When I shared the warts-and-all deep dive into my portfolio in the first article of this series, I was suitably inspired (or rather shamed) to clean things up in time to present my sparkling new portfolio for the next article.

I haven’t entirely succeeded on that front although progress has been made. In my defence, it’s been challenging to see past the febrile unleashing of animal spirits around the Trump 2.0 policies (forget Chinese tariffs, who doesn’t want to know if Donald will finally pardon the Tiger King?).

But, after a whirling dervish of mass-selling, I’ve whittled down my 66 investments into fewer than 45 (across my ISA and SIPP) as my multitude of active funds had started to mimic an index tracker without the cost saving.

I’ll come back to the casualties and survivors of this clean-up operation shortly but I wanted to start this month’s soul-baring with an age-old dilemma: when should you cut your losses or indeed cash out your winners?

The bare necessities

I don’t know whether any of you own the catchily-named tome “The Naked Trader” but, if not, the photo on the front cover should really come with a trigger warning. Definitely one of those books I hide under my dusty copy of “The Fundamentals of Corporate Finance” for Teams video calls from home (and on a similar topic, any semi-dressed family members for fear of recreating Professor Robert Kelly’s ‘memorable’ BBC interview on South Korean politics).

According to author Robbie Burns, it aims to show “how anyone can make money trading shares”.  Here our paths diverge as trading and investing are two very different beasts, however, he makes some useful suggestions for long-term investors.

Letting go of losers

Burns describes mistake 16 (the number of potential pitfalls starts to feel rather endless at this point) as “hanging onto losers”. Burns advises ditching ‘your losers’ early rather hoping they’ll go back up (which is particularly tempting if you’re a closet chartist). He believes a 10%-plus fall in share price should prompt investors to think about closing positions and sets an automatic stop loss at 15% to remove emotion from the equation.

The idea of using stop losses is a good one, though the 10-15% rule is arguably a blunt instrument when it comes to more volatile investments. But it’s true that preserving capital can be as powerful a weapon as picking winners: as we know, a 50% fall in the value of an investment requires a 100% increase to break-even.

I’ve used stop losses in the past and, if you don’t want to set a fixed price, some providers offer trailing stop-losses fixed at a percentage below the market price. The ability to use them for investment trusts is also a distinct advantage over open-ended funds.

At this point, it’s probably time to park the principles in favour of a “don’t make the same mistake as me” confessional. Top of the list is Saga (SAGA) which I merrily bought at £15 a share on the back of market froth about its new cruise ships. Enter the pandemic and funnily enough, the over-50s weren’t that keen to float around in the ultimate Covid petri dish. Its shares now languish around the £1 mark (and yes, I still hold them).

Next up is Aston Martin (AML). Iconic cars with the ultimate seal of approval from 007. My days in corporate finance taught me that IPOs are usually priced for a 5-10% pop on the opening day so I decided to dabble in a bit of day trading. I paid £19 when trading opened, leaving me needing more than a quantum of solace as the share price fell off a cliff. The stop loss was but a distant memory when I finally cashed out a year later around the £4 mark, though IPO investors will be both shaken and stirred by their 97% loss.

Riding your winners

Moving onto a happier subject, if you’ve eliminated the other 19 mistakes, Robbie Burns puts “not running profits” at number 20 or, in layman’s terms, cashing in your gains too early. His advice? If you hit a 30% gain and you’d still invest at the higher price, then leave your winners to run.

One bittersweet example is Hargreaves Lansdown (HL) which I bought at £1.60 on its 2007 IPO. Buoyed by the rise of the DIY investor, the share price eclipsed £24 in 2019 and, heeding the advice about backing your winners, I remained invested for their waning back to the £7 mark. To add to the pain factor, I instigated a ‘bed and ISA’ switch but didn’t get around to the buying back part before they bounced up to £11 on the announcement of a take-private. It still rankles.

Coming back to the litmus test of “would I still invest at the current price?”, I’ve been an investor in UK small-cap specialist Rockwood Strategic (RKW) since early 2021 and it’s more than doubled my money. Manager Richard Staveley has achieved impressive returns (including a NAV return of 23% in the latest interim results), despite small-cap indices being in negative territory for much of this period, and I’m backing his ‘self-help’ strategy to continue delivering solid returns.

All change, all change

There’s still work to be done on the de-diversification front but I’ve tried to consolidate holdings into (hopefully) the most promising options within each sector.

• New buys: the newly-merged Alliance Witan (ALW) should be a good core holding, offering a ‘manager of managers’ one-stop shop for global equities. I’ve also added MIGO Opportunities (MIGO) after hearing manager Charlotte Cuthbertson talk about identifying undervalued investment trusts on our recent Market Matters podcast and there’s scope for investment trust discounts to narrow, particularly in the more specialist sectors such as private equity.
• Close calls: I’ve made a 160% return from my long-term holding in Fundsmith Equity but its performance has been underwhelming in recent years. I’m keeping it for now due to its technology and biotech exposure but it remains on my watchlist. I’m trying to claw back a 30% loss on Scottish Mortgage (SMT) so I’ve gritted my teeth and upped my stake, also due to its exposure to the Magnificent Seven and some European heavy-hitters.
• Emerging markets: Invesco Global Emerging Markets was the beneficiary of my sale of Baillie Gifford Emerging Markets Growth and Leading Companies on the basis it’s been a top-quartile performer over one, three and five years. Out went GS India Equity Portfolio to top up my holdings in Jupiter India Select. This was a tough decision as they’ve both achieved 100%-plus returns over the last five years but Jupiter’s higher weighting to financials clinched it on the basis that financial inclusion initiatives should be a tailwind for growth.

That’s probably enough about my portfolio purging for now. I still have a fair whack of my newly-sold portfolio uninvested but at least it’s generating a modest return as HL pays interest on cash held in ISAs and SIPPs.

And given my 20-year-old son’s disconcerting fondness for cheesy rom-coms, I’m hoping my Very Important Portfolio Reshuffle might just provide the perfect excuse to avoid watching The Holiday for the fifth year in a row. On that note, here’s to a Santa rally and see you in the New Year!

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