Is now the time to sell under-performing shares?
Stock market uncertainty has many investors spooked. The market's volatile, and the looming threat of a second wave of coronavirus infections could foreshadow further losses. Yet on the other hand, the Aussie stock market has already recovered about half its losses since it walked off the cliff in late February.
We asked some leading investment experts for their take on the situation, and how they believe investors should think about playing the hand we've all been dealt.
Stuart Fechner, Bennelong Funds Management
It may be the time to review poor performing shares.
You need to understand why a share has performed poorly. It would be short sighted and perhaps costly to your overall returns to automatically sell poor performing shares without understanding the why.
Winston Churchill famously said "never waste a good crisis" and I think there's a lot in that.
It doesn't mean you need to change everything, but I think it's reflective of an opportunity to review and understand your investments during a time of crisis. What can you learn from it and from your investments.
This incorporates an understanding of both what led to the share price fall, but also to having an eye on things looking forward. What has the company done in response to the challenging environment or circumstances, and what are its prospects looking ahead and for recovery.
It may well be the case that you end up judging a share to be oversold and that it's an opportune time to top up if you have a view to maintaining the holding long term.
It's also important not to be too blinkered or stock specific with your assessment, but to understand each share in the context of your overall portfolio.
It could be that the majority of an investors stocks all fell due to the same or similar reason, such as a significant fall in energy prices.
If you blindly sold all these poor performers without an eye on the bigger picture and overall portfolio. you are likely to end up with a less diversified portfolio than when the crisis commenced. At some point this resulting lack of diversification could have adverse consequences.
Jonathan Philpot, HLB Mann Judd Sydney
I am a reluctant seller of shares, which has caused me great pain. However, over the long term, not selling the banks at the bottom of the global financial crisis, holding onto BHP through 2016 when resource prices were bottoming, has resulted in significant returns since those lows.
Just about all stocks will go through a period of poor performance and the share price will significantly fall, most of us will not sell in time and the portfolio will suffer - it is the share market ride, and if you jump off at the low point, you tend not to buy back in until the share price has already jumped 20% to 30%, that is a significant financial loss that is now locked in.
There are some shares that will simply never bounce back and the key factor with most of these stocks is too much debt. These are the stocks that have probably been on a downhill run for a few years and will simply never climb back. Sell and realise the capital loss and hopefully invest into a new stock that will provide a multiple upside to the loss suffered.
Max Cappetta, Redpoint Investment Management
We humans like to think that all our decisions are purely based on fact. In reality a good dose of emotion is always included whether we realise it or not.
When it comes to dealing with matters of high uncertainty (e.g. the share market), our emotive or behavioural selves usually comes to the fore.
Behavioural biases in human decision making has been well discussed and analysed over many decades. Common examples include loss aversion and anchoring. It is common for investors to hold on to losing positions for too long. Even when faced with a range of contradictory information, we find it hard to reverse a previous decision.
So in these periods of high uncertainty and emotion, it is important for investors to re-focus on their longer-term financial objectives rather than seeing these periods as a trading opportunity. With June 30 arriving very shortly, investors should be considering the after-tax outcomes of their investments. Reducing a tax bill through sensible rebalancing (to offset realised gains with realised losses) makes good investment sense.
The high volatility in equity markets at the moment also raises another issue. Where possible we should rebalance portfolios matching selling to new buying. 2020 has already seen over 35 days where the ASX200 has moved by 2% or more. Being out of the market and missing a few upward days can be very costly.
Hamish Tadgell, SG Hiscock & Company
As active investors we are always thinking about competition for capital - that is, which stocks command the best use of our capital at any point in time and where we expect to generate the best return.
We believe that in the short term, markets are inefficient and market sentiment and pricing may not reflect a company's underlying value. We seek to exploit that through taking a longer-term perspective, and are prepared to accept volatility as cost of higher long term returns
Our decisions to sell are typically driven by three things: if risk-return cannot be improved, if there has been an impairment to the earning power of the business, or if we believe management becomes incapable of building value.
Troy Amstrong, Koda Capital
This decision will obviously be very stock specific but, given the market rally we have experienced over the last 6-8 weeks, which has been driven by central bank stimulus rather than growing company revenues, and one that has lifted most assets, taking advantage of this situation and possibly selling assets that are a causing a level of concern, would be a prudent move. If a stock of yours wasn't doing all that well pre-coronavirus, the chances are it really won't be doing well post-coronavirus. Use the current market buoyancy to your advantage.