I have an interesting little challenge for you to complete during 2014: do not sell a single share.
If you accept this challenge, then you should immediately be considering a number of possibilities: (1) One or more shares in your portfolio may crash, (2) One or more shares in your portfolio may rise phenomenally, and/or (3) You may find better opportunities in the market to stick your capital into. All three (and, in all likelihood, a combination of) scenarios could all trigger the itch to sell a share.
So why is not selling so important?
Ignoring the obvious tax savings (CGT is only triggered on disposal of an asset) and brokerage savings (only triggered on buying or selling a share), there are much more subtle reasons for this challenge.
Firstly, if you accept this challenge, go and have a proper look through your portfolio. While we all drone on and on about "the long term", often we find ourselves managing our portfolios, investments and stock positions in real-time. Real-time is, by its nature, short term. If you are forced to hold the current stocks you own (and any new ones you buy) for a full year before selling, it does force you to evaluate them with a long-term perspective.
You are forced to look at your current portfolio and ask: "Is each one of the companies whose stocks I own worth holding for a year?"
Secondly, this drives you to consider the single most important ratio in the entire global financial market: Risk/return. While a stock that is 5% undervalued right now may sound like a good buying opportunity, is it? A 5% value uplift may not be worth the downside risk that may drag the share price even lower with a time horizon longer than a year.
Making long term investment decisions based on short term share price movements is just plain lunacy.
In other words, a longer time horizon makes you focus less on your entry points and more on the underlying company. After all, the underlying company is what you are actually buying and in the long term fundamentals drive valuations that drive share prices that drive returns... Hence, focusing on the fundamentals for long term investment decisions is logical.
Thirdly, the combination of all of the above is that your investment decisions become far harsher, far more critical and, in all likelihood, better quality. Better quality investment decisions will probably lead to better performance and a richer "Future You".
In conclusion, I am going to try this challenge myself. I have re-evaluated my portfolio and I am comfortable I could hold it for the next ten years, let alone the next twelve months.
That said, things can always change and not selling a single share in 2014 may be a little more challenging than it sounds. I suspect 2014 is going to be quite a volatile year, especially in South Africa. Volatility implies quickly changing price levels that often creates exit itches for market participants.
Even if I (or you) don't succeed in this challenge, it should at least lower my (and your) portfolio churn. Given that "over trading " is one of the greatest erosive factors in long-term returns, lowering portfolio churn can only be a positive.
I will report back on this in a year's time.
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