Profit on buy and hold

Mark2016

Hi everyone

I like to invest in good dividend paying shares for income. My strategy is to buy on dips thus increasing my holding. Recently I invested in Anglo Pacific but to my surprise my investment has increased over 20 percent. The current price is way above its 200 day moving average and I m currently in a very good potential profit. As I invested in Anglo Pacific for dividend income. I’m wondering if I should try and capture the increase I have incurred. I still want to invest in Anglo Pacific. Just wondering what typically buy and hold investors do when one of their holdings increases dramatically. Do they employ a stop loss and keep raising it in tandem with the increasing share price. When it is triggered, they capture the profit. Do they typically sell and then invest again at the then lower price. If I were to sell my current holding should a stop loss be triggered, then invest again, is this a typical strategy people employ? Or would it be better to sell the monetary amount which I have made in profit less charges? Would appreciate suggestions/advice. Many thanks

bowlhead99

Let's say you invested £10k and it became worth £11k and then £12k and then £13k. If you like, you could set a stop loss at £12k as you say, and then when the holding falls to £12k, it will get sold and you will have £12k cash, of which £2k is gain.

However, that's pointless if you are then just going to spend the £12k on buying more Anglo stock - basically buying back the same shares you just sold.

By the time you place the trade to spend your £12k cash on Anglo shares again, you may get more shares or fewer shares for your money than you previously held - perhaps more likely to be fewer, because you have to pay 0.5% stamp duty to buy Anglo shares in the market, not to mention the broker fees to sell and buy. And you are still basically in the position of having £12k- worth of Anglo shares and zero cash. You haven't 'captured' any profit, because your money is still all tied up in the value of the shares; albeit what you hold is worth more than the £10k you'd first started with, but you are still exposed to all the risks of being an Anglo shareholder and you haven't 'locked in' any profit. It could all still be worth zero if the company goes bankrupt.

So no, the idea of getting out of your holding at a stop loss and then investing right in again is not something that long term investors "typically" do. Day-traders might do it. Probably with as frequent, or more, failure vs success.

A more common strategy is to say (e.g.), I am going to hold a lot of investments in my diversified portfolio of funds and shares but I have a lot of confidence in Anglo so am going to put a relatively large percentage of my investment portfolio in it, say 4% just in that one company, leaving 96% in other companies and diversified investment funds. For example Anglo at 4% of a £250k portfolio would be a £10k investment in Anglo.

Then if your Anglo holding grows rapidly in value to £15k, while nothing else in the other £240k of investment portfolio grows in value at all (or some things go up but are cancelled out by other things going down), Anglo would then be £15k out of a total £255k portfolio, which is more like 6% than the intended 4% starting level.

So you might think to yourself, hmm, I still like Anglo but I don't want more than 4% of my portfolio in Anglo so I will sell about £4800 of my £15000 Anglo shares leaving £10.2k invested in that company (4% of the £255k portfolio), freeing up £4800 of profit to invest in some other investment. Or you might decide not to bother with arbitrary percentage limits and just decide that a nice round £10k in any one company is enough really. In that case if you see the Anglo value is at £12k or £13k or £15k, you can sell a portion of it to get back to £10k exposure in that company, and likewise reinvest the profit in something else.

The key to doing either of those 'rebalance' techniques is not to check the stock price every day as if you do a little sale every day it will cost you a fortune in dealing fees. You can perhaps set a limit order well in advance to make sure the holding doesn't go over a certain value without some of it getting sold.

For a long term investor a 'stop loss' as you suggested doesn't make a lot of sense. Say the shares are worth £13k today. If that's higher than your target allocation to that company, you could sell some right now. There isn't much logic to say wait until it falls to be worth £12k and then sell - that seems to be wasteful. If you want to cash out some of your exposure to that company to buy other assets or boost your cash savings, just do it.

Reed_Richards

Mark2016 wrote: »

I like to invest in good dividend paying shares for income. My strategy is to buy on dips thus increasing my holding.

This isn't really part of a buy and hold strategy. You buy because you think the shares are undervalued (and pay a good dividend) and sell when they are no longer undervalued

Mark2016 wrote: »

Recently I invested in Anglo Pacific but to my surprise my investment has increased over 20 percent.

To a buy and hold investor a 20% increase is very small potatoes

Mark2016 wrote: »

The current price is way above its 200 day moving average and I m currently in a very good potential profit.

Buy and hold investors pay no attention to moving averages.

Mark2016 wrote: »

As I invested in Anglo Pacific for dividend income. I’m wondering if I should try and capture the increase I have incurred.

Unless the dividend per share has gone down this makes no sense whatsoever.

Mark2016 wrote: »

I still want to invest in Anglo Pacific. Just wondering what typically buy and hold investors do when one of their holdings increases dramatically.

Really, 20% is not a dramatic increase. 200% maybe.

Mark2016 wrote: »

Do they employ a stop loss and keep raising it in tandem with the increasing share price.

No

Mark2016 wrote: »

Do they typically sell and then invest again at the then lower price.

Absolutely not.
You really haven't got the hang of buy and hold, have you. You buy and then you hold. You hold until the fundamental reasons you had for buying change.