fallen 40% in a week, page-41

re: apologies macrae12/poyndexter/apology accepted Be honest and ask if your relationship with your stocks is really working out

WEALTH WATCH
PHIL DOEL

WHEN it comes to investing - just like in life and love - sometimes it's hard to let go. It's easy to grow attached to certain things in your life, such as relationships, houses or cars, and change is often a hard thing to come to terms with - even if it's the right thing to do.

Stocks are no different. If a stock that has done well starts to wane, human nature is to give it a second chance - to hold onto it just that little bit longer to see if it comes good. It made you a lot of money in the past, so it might be best to hang in there and see it through.

Equally, if a stock rises sharply and then plateaus, most investors are likely to hold onto it in the hope of squeezing out a little more.

In many ways, holding onto a stock for too long can be worse than selling it too early, yet psychologically, letting go is one of the hardest things about stock picking.

The consequences of holding onto falling stocks for too long are obvious, and there are many war stories that demonstrate the danger. When the tech bubble burst and prices were plummeting, many people found it incredibly hard to sell their holdings to avoid further losses, believing - or desperately hoping - that their particular stocks might turn around.

Another common mistake is to hold onto rising stocks for too long. This may sound counterintuitive... why would you want to drop a stock that is on the up? Obviously it is a matter of timing, but just as there is a right time to buy a stock, there is also a right time to sell a stock after it has made you money.

Put simply, holding a stock for too long stops you from making money on other stocks that may be on the rise. If you have already ridden the wave of growth as far as it is going to go, it is best to lock away the profits and find another stock that will do the same thing.

In the past, holding onto stocks may not have been as important as it can be these days. The 1980s and 1990s were an exceptional period for equities, and investors were rewarded just for being in the market. But that climate has now moved on.

Equity markets have now reverted to more "normal" long-term patterns of behaviour, and going forward I expect average annual returns from equities to be more modest than investors enjoyed at the tail-end of the 20th century, albeit with a greater mix of up-and-down years. In a world of lower index returns, I believe successful stock-picking is a far greater contributor to overall performance than it has been over the previous two decades.

One way to introduce discipline to your stock-picking is to limit yourself to a maximum number of stocks in your portfolio, so that there has to be a very specific argument for every holding you have. Think of each stock as an investment "idea".

Hundreds of firms are listed on the UK market, so narrowing that down to a list of, for instance, your 25 best "ideas", really focuses the mind on what each company can bring to the table. Then, when you look at a potential new stock idea for the portfolio, you have to weigh up whether it merits replacing any of your existing holdings. It means you are constantly reviewing the case for keeping each holding, and you don't get the "long tail" often found in conventional portfolios where yesterday's ideas are left hanging around.

A further rule I use to ensure discipline in my stock-picking is to create a policy of equal weightings for every stock. For instance, in my F&C UK Opportunities fund, I limit myself to only 25 stocks, each of equal weighting within the portfolio (4% for each stock). If (through share price appreciation) a holding rises to 5% of the portfolio, I will trim it back towards 4%. If it falls close to 3% then I will take a view on whether my belief in the stock is enough to top it up to 4% again or whether I should replace it entirely. It's a Darwinian approach where only the strongest ideas survive. It means I have to have a high degree of conviction in each and every holding.

Some things in life are forever, like marriage and parenthood. Others are for as long as they're useful, like cars and houses. Just because a stock has done well for you doesn't mean you should feel married to it.

• Phil Doel is director of UK Equities at F&C

This article: http://news.scotsman.com/health.cfm?id=182320200