Ask Colin

If you take a position according to your investment plan and it fails to move, when do you give up on it?

This is not an entirely straight forward situation to answer. In other words, it all depends.

In the last year, I have been building my portfolio as the bull market has unfolded. While it might be argued that I would have made more profits by moving in much faster, there is a large element of hindsight in that suggestion. Bull and bear market trends unfold slowly month by month. In the early stages of a bull market the risk is higher than once we have seen a few peaks and troughs and there is more certainty that it is a bull move and not just a bear market rally. So, I will increase my holdings progressively as the evidence mounts that the trend has changed and the risk is therefore gradually reduced.

In this building phase, I will give a non-performing stock plenty of room while it stays above its stop-loss level. It is always the case that all stocks do not move up together. Some companies will go very quiet for months and then spurt upward in a short period. Transaction costs and tax considerations have to be considered and in general I give them time to work out.

However, when the portfolio process is finished and I am fully invested, my attitude has to change a little bit. Not a lot, but a bit. If I see a good stock that is moving up well, the only way I can buy it is to sell something I hold. The question is what to sell? I sell the ones that have not yet performed.

It is important to understand what I mean by not yet performed. I mean a stock that I bought and has never gone much higher. I would sell this stock before I sold one that had gone up quite a lot, but was now not going far very fast. There is plenty of room for argument about this one way or the other and I don't think I am any more right than someone who makes a different judgement. My view is based on the idea of letting your profits run. So I sell the ones with little or no profit, rather than the ones where I already have a profit to let run.

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