Rather than putting a hardcoded 10% stop loss as what day traders would do, if you are thinking on investing in the long term, you should keep the share for at least a few years.
Now, if the share drops by 10%, I would be concern but rather than panicking, I will investigate. I want to know what’s the driver. Is it a fundamental issue such as company announcing lower revenue or is it driven by market and in which case there is no clear reason? You then look at the shares on the basis of your whole investment portfolio. My risk tolerance is 10% of my portfolio, not individual holdings and if the shares contribute to most of this, then I would probably sell it. In reality, no one shares in my portfolio could have done this because I never put in more than 2% in any one holdings except for bonds and stocks ETFs which form the bulk of my portfolio and I would hold it regardless of the fall because of the benefit of diversification entrenched in it.
To give you an example of when I was faced with similar scenario, let me explain my investment in Lloyds shares. I bought their shares when the price was £0.49 around August last year. It then went up to about £0.60 around October. I sold half of my position so that I realise the gain. I reviewed the company’s valuation and since most analyst predict that the shares intrinsic value is around £0.90, I decided to hold the remaining 50%.
I want to buy more but now that I have sold half of my Lloyds shares, I don’t want to invest in it again in case my thesis was wrong. I know Lloyds is restarting their dividend payment then so I hang on to the other half and set a plan to hold it for at least three years to get all the dividends.
Towards the end of the year and early 2020, the share prices get volatile initially hovering around £0.50 and now with the pandemic, it gets down to £0.38. To make matters worst, Lloyds is suspending its dividend payment.
I am faced with a decision, do I sell or do I hold?
I reviewed the company’s valuation again and I think they have a strong cash position to withstand the crisis. The issue is on its intrinsic value which fall dramatically from £0.90 to to about £0.35 which means that Lloyds shares are now over valued. Despite this, I think Lloyds will still be here in the next three years, probably stronger than ever especially since
I have already realised some gains and I think the government would not let it fail. Even if it does, the holdings is only 1% of my portfolio so it is still within my risk tolerance. I then saw one insider buying the shares at £0.33 and I know this is a good sign so I decided to hold on to the shares.
In the context of my portfolio, the fall in value of Lloyds is far offsetted by the rise in my holdings in government bonds and stocks ETF so I don’t worry much. The worst thing that could happen is losing 1% and I can stomach that.
At the end of the day, I would echo with everyone sentiment here. You need to figure out what works for you. This works for me. The way to find out what works is to try it out. Limit your loss to 1% of your portfolio or if your portfolio is small, the amount that you can lose without losing sleep over it.
This is why I love Freetrade as my portfolio can be as small as £100 and still limit my lost in any one particular holdings to 1%. What I find annoying now is that I can no longer buy a stock if the toal value is less than £2. In this case, your portfolio needs to be at least £200, which is doable for everyone.
If you have any questions let me know but in case you are wondering, I don’t do the valuation myself as I don’t know how yet. I use a website called Simply Wall Street which update their valuation in real time. They are quite reliable and to date, it has added a lot of value to my investment plan. I am not paid to do this and will not get any profit hence why I didn’t share any link. Just Google it and you will find it.