How to know when to quit an investment

Patience is a virtue – particularly when it comes to investing. We might agonise about the ‘right time’ to invest, but data shows us that the old saying is correct: it’s time in the market, rather than timing the market that tends to pay off.
Analysts at RBC took the hypothetical case of an investor planning to move $3,000 of cash into a balanced portfolio every year, starting in 2004. An investor with perfect timing would put their funds into the market at its lowest point each year. After 20 years, their pot would have grown to $136,000, as the chart below shows.

But you don’t need to have such impressive foresight to generate good returns. Over the same period, a cost averaging approach (where each year you make twelve equal monthly contributions of $250) would have delivered a total pot of $125,000. An investor with the worst possible timing (wading in each year at the market’s highest point) would still find themselves with $118,000. This turns out far better than the alternative – staying in cash for fear of making a mistake – which results in a pot of just $70,000.
When it comes to staying in the market, patience is a virtue again. In 2021, research from Schroders found that investing £1,000 in the FTSE 250 would have made you £44,000 over 35 years – but only if you stayed invested over the entire period. Take out the 10 best days, and the figure collapses to £24,000. Miss the best 30, and it shrinks to £11,000, as the table shows.
Invested the whole time |
Less best 10 days |
Less best 20 days |
Less 30 best days |
|
FTSE 100 |
£17,323 |
£8,483 |
£5,282 |
£3,461 |
FTSE 250 |
£43,595 |
£24,156 |
£15,487 |
£10,627 |
Source: Schroders
You might think that only very bad investors miss the market’s best days, but it is easily done for the simple fact that they tend to follow the worst ones. Missing the bad days is undeniably good for returns – but not if it means missing the best, too. Calculations from Vanguard suggest that moving a 60/40 portfolio to cash in a panic carries a 60 per cent chance of underperforming the market after one month – and 80 per cent after twelve.
But sometimes it pays to get rid of a stock
There are, however, times when it pays to sell, especially when it comes to individual holdings. A decade ago, the IC’s Philip Ryland came up with three good reasons to dispose of a stock: if the original assessment is wrong; if there is an unforeseeable circumstance/misfortune; or if an irresistible opportunity arises that is a better use of capital. James Norrington produced an update based on postmodern portfolio theory last February (‘How to know when to sell shares’). But even when a holding meets your criteria, breaking up is not easy to do.
New research from Joe Kable, a psychologist from the University of Pennsylvania, shows just how much our brains wrestle with the decision about whether to stick with something or whether cutting our losses is the better choice. In his experiment, participants had to decide when to “cash out” virtual coins that increased in value over time. Some matured (ie were able to be sold) quickly, but others required a longer wait. The latter followed a ‘heavy-tailed distribution’ – if the coin didn’t mature in the first couple of seconds, it was better to stop waiting and move on. Crucially, participants were not told about these distributions, forcing them to learn from experience.
Kable and his team studied participants with lesions to specific parts of the brain, allowing them to test how different areas contribute to our decisions to persist or quit. They found that choices depend on both our willingness to wait and our ability to learn from our environment – and both are taxing processes.
Quitting an investment proved difficult, even when it was just a virtual coin: according to Camilla van Geen, who worked on the study, both quitting and persistence “require complex mental calculations”. She added that both “can be the right choice depending on the situation”. So when it comes to investments, patience isn’t a virtue absolutely all the time.
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