When should I sell?
Posted by: Brian Dennehy
Last week, the Telegraph got in touch asking us: “when should investors sell?” That’s something we’ve been talking about a lot recently, particularly off the back of the February Wobble.
With that in mind, here were our thoughts for the Telegraph, a checklist of sorts for investors. The question was also asked “do you just need patience and a failing fund will eventually come good again?
Our research shows that 92% of funds cannot beat an undemanding benchmark*. Patience does not rescue you from this fact – it merely means that, like the stopped clock, from time to time the fund might do well. But as a long-term investment strategy patience is a recipe for mediocrity, and is the refuge of the lazy, at a huge cost. Those who insist they have succeeded by “investing and forgetting” are not skilful, but lucky, and are more likely to have been lazy than thoughtful.
Yet although 92% of funds are mediocre at best, even the High Priest of efficient markets and proponent of index trackers, Burton Malkiel, identified one key fact: a good number of active fund managers will always be successful over shorter periods, you just need a process to identify them. The rewards for doing so are considerable, and what is needed is process and discipline.
Back to the immediate point, here are some bullets on the red flags. It isn’t just about the fund. At least as often, it is about you as an investor. Some of these over-lap, and some are alternates. But a good number will be recognised by most investors.
• You didn’t have any good reason to buy the fund in the first place
• You didn’t write down why you bought the fund (even if it was a poor reason)
• You believe you have some special insight or skill to select funds (or any other type of investment)
• You have no objective process to select funds (and investments generally)
• You tend to buy into stories – you are a believer rather than an investor
• You played “follow the fund manager” when they moved to pastures new
• You believe experts and press tips
• You tend to buy because everyone else does – in the herd rather than independently thinking
• You tend to ignore views and warnings which don’t support your fund purchase
• You ignore the evidence of the numbers, and prefer a good story, because it’s less effort
• You allow emotion to triumph over the evidence
• You find yourself holding onto funds long past their “best by” date
• You endure “the slope of hope”, where the slope is your fund’s performance going persistently down
• You are always, perhaps daily, checking performance
• You have given up checking performance, and don’t open emails or letters with valuations
• You don’t have a specific time when you actively review your funds (say 6 monthly)
• You do not use a simple method for rating funds which will prompt when to sell
• You have not identified a relative performance benchmark which, when breached, means you will sell
• You have not identified a level of falls which if breached will trigger your sale e.g. a 10% loss
When should I sell?
Asking yourself “when should I sell?” is a great way of testing your investment approach. Before you can think of when you should sell a fund you need a reason to have bought in the first place! You need to know what it was that triggered the “buy” before you can possibly think of selling.
Otherwise, you might end up with the response the tourist received from the Irishman when asking for directions:
"I wouldn't start from here, sir".
You must have a process for selecting funds. When a fund doesn’t meet the criteria that you have adopted, that is the time to consider selling.
Buying a fund and not reviewing it regularly is never a good strategy for long-term outperformance except through luck. In fact, it is typically a strategy for mediocrity, at best.
To manage falls you can also use tools like stop losses e.g. if a fund falls by 10% I will automatically sell it.
But too many retail investors just don’t pay sufficient attention. Unfortunately, this is not just an investor problem. Too many advisers are influenced by those same marketing stories, and a tick-box mentality – more critical thinking is desperately required.
Here are two examples. There are others.
Standard Life GARS fund, now the biggest retail fund at £19bn, has been going nowhere for three years, and the greatest part of this fund’s size has been driven by advisers and other investment professionals (more here).
Woodford Equity Income, 4th anniversary just ahead, has been drifting for 2 years, and the last year has been shocking compared to good alternatives (see here).
There are many other examples of under-appreciated and hidden risks. Investment grade corporate bond funds in 2008. New Star International Property in 2008.
How about the liquidity risks now in corporate bond funds? Do investors realise that these funds can be suspended if (when?) the market becomes illiquid?
What about the FP Argonaut Absolute Return fund? It is in what many believe to be a “widows and orphans” sector, Absolute Return. Its biggest holdings are in Russia, Greece, Italy, and Hungary. Phew.
Investors need to approach investing methodically or else they risk slipping into decades of mediocre performance, at huge cost to them.
ACTION FOR INVESTORS
Ask yourself why you bought your funds
What is your process for selling?
And how will you get back into the market once you’re out?
* Our undemanding benchmark is that a fund must be in the top 40% of performers in 60% of the time. The “time” is the 120 overlapping 6 monthly periods in the last 10 years.