Investments Only Yield A Profit Or Loss When You Actually Take It

It's very tempting to create a spreadsheet and look at what would happen if only the share price did......

And while waiting for this to happen the share price goes up and down and you make nothing.

Paper Profits

If the point of buying shares is to make a profit, then you must sell them to actually have a profit.

This sounds obvious but it is much harder to do than it is to say and even now I still sometimes get tempted to hold on too long and lose a 10% profit because a chart suggests that more is possible.

I blame it all on the spreadsheet and the profit amount column says that only another 10% rise and I can go and buy a Gold Rolex!

Setting And Following The Rules For Selling An Investment

When you purchase a share you should decide on sell criteria and then stick to them, typically based on three rules.
  • Sell at a certain profit, anything more than 10%-15% is drifting away from the short term.

  • Sell at a certain loss.

  • Sell regardless of price on a certain date.

When setting a sell price you may wish to consider if it is a share that is being traded in quantity by automated systems and the willingness of these systems to enter into numerous 2% cycles of buy/rise/sell/drop/rebuy.

If you reach your target profit, then take it. You thought about this amount when you bought the share and it is not a profit until you take it.

If you have chosen your target sell price correctly, it will go up a bit more, then stagnate or drop.

If your sell date arrives, then the market has no interest in that share, so sell. This rule is slightly flexible, but only slightly, if there is recent activity in that share then set a new sell date.

If you have bought a share after a big drop and a stabilization period the temptation to hold on for longer will be very strong as there is clearly more room for growth.

If you have hit your maximum loss the temptation is to hold onto a loss as "the price will recover with time."

This is a no no, waiting for the recovery can easily drag on and on and then never appear, during this time your funds are not generating a profit.

It is hard to do but you must accept that you will make some wrong decisions and lose money.

Once one of these criteria is reached you must sell as the important thing about this strategy is that trading takes place.

It is not at all unusual to see a share price drop 10%, 20% or even 40% overnight, so the profit that you thought you had has not just disappeared but you are now in a loss.

Equally it may rise overnight on good news, so it is important to be aware of things like reporting dates and then drop back.

Finally it is a "bit off" but for the small investor the opening price is not the same as yesterday's closing price and you won't be able to trade at the opening price.

Don't Waste Time With Regrets

It is very tempting to look at the past but the objective is to make money.

Being right means taking the profit that you can reasonably expect, if it turns out that there was a bigger profit available, see if your definition of reasonable was wrong.

If you were to look at the Home Retail Group (LON:HOME, Argos and Homebase) during 2012 it is easy to say buy at about 80p, wait a few months and collect a 40% profit.

During this period Comet went into administration, whilst with hindsight you can create arguments about why they were different this is still hindsight.

As Comet was in private hands you couldn't have bought shares anyway, but if you had it would have been a total loss.

The objective is to make money, every time you do something risky and lose a portion of your investment pot you are going against that objective. It is nice to dream about making a 500% profit, but the reality will probably be a loss that sets you back 6 months or a year.

No Suitable Share To Buy, Just Go And Sit By The River

Sometimes you will sell a pot and struggle to find anything to do with the money, all of the shares that you watch are outside of the zone that you would buy them at.

What now? It feels wrong to just leave the pot as cash in your dealing account, but sometimes it is the right thing to do.

Buying the wrong share and losing money is worse than not doing anything and not making a profit for a few days.

At the risk of stating the obvious, if there is nothing to buy, then there is nothing to buy.

The fact that you want to trade doesn't mean that there are any shares that are worth trading.

Just go and sit by the river, I have been caught out in the past by thinking, "just stick it in bank shares, they are fairly stable" just in time to see them drop by 33%.

This may be a good time to consider that pot and should I;
  • Transfer some of the profits to a safe haven such as a building society account or an ISA.

  • Transfer the pot to any alternative investments that you may have, such as property or classic cars.

I used to have what I thought were safe shares, ones that would not drop even if they didn't rise and I used these when I couldn't work out what to do. Even the safest of the safe aren't really that safe in the short term so I no longer do this.

The other option I used to try was to buy more of what I already had in other pots. The trouble with this is that the other pots may already be close to the sell point or they may be not great buys and adding more of that share just ties more money up.