Why selling to lock in FTSE 100 profits may not be the best investment strategy

The FTSE 100 index has recently moved above the 7,000 level though it is fair to say that progress has been slow and cautious.

However, since it has taken 15 years to regain the position it held at the end of 1999 investors should perhaps be grateful it has at least challenged this totemic hurdle, especially given the many political uncertainties capital markets currently face.

It is important to point out that anyone invested in the index over that period would have made a total return, before costs, of about 70%. Despite the index ending the period back where it started, equity investors would have benefitted from a steady stream of dividends that, if reinvested, would have delivered a substantial gain.

Nevertheless, it is clear from the level of transactions in and out funds over the last few months that many investors have taken the opportunity to sell some investments as the FTSE 100 regained its previous high.

One of the many arguably misleading myths about investing is that it is never wrong to take a profit.

If cash is required for a specific purpose then of course it makes perfect sense to realise cash.

But if the motive to sell is simply to lock in a profit it immediately raises some questions such as: What to do with the cash and when to reinvest it?  

With interest rates at historically low levels on cash and bonds none of the alternatives look appealing.

On top of that timing investment back into the stock market is just as tricky as timing an exit.

The alternative option of just letting your investments run can be difficult, but an excellent demonstration of why it makes sense was recently provided by a 92-year-old American janitor.

When he died, Ronald Read left an estate worth $8m, yet this WWII veteran only ever worked in a garage and as a caretaker in a local store. He rarely traded his shares, preferring to reinvest the dividends he received from his portfolio of 95 blue-chip dividend-paying companies.

By reinvesting his dividends he effectively invoked the magic of compound interest, which allowed his portfolio to accumulate into a very substantial pot despite the trials and tribulations of the capital markets.

It would also seem that he didn’t pay too much attention to the levels of the stock market indices over that long period.

The lesson here is that for anyone who can stomach (or ignore) the short-term volatility, investing in the stock market can be very rewarding in the long term.  

And while doing nothing isn’t easy, especially in today’s news-driven world, if the temptation to trade can be avoided then doing nothing will often be the more profitable strategy.

About Rob Davies: Rob Davies of Maven Capital Partners occasionally writes articles when he isn’t managing the VT Maven Smart Dividend UK Fund.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

3 thoughts on “Why selling to lock in FTSE 100 profits may not be the best investment strategy”

  1. There can never be enough said about the power of dividends. I only wish that more British companies would pay quarterly distributions instead of the annoying unequal bi-annual payments that the overwhelming majority make. I often feel that British investors after not that interested in dividends, partially for this reason. It seems that most people think the way to make money on the stock market it to buy some exciting (ie rubbish) growth stock and then sell at a profit. This sentiment is along the lines of ‘seeking at a certain (arbitrary)point’ eg when the market hit 7000. It doesn’t even make sense.

    1. Hi M, that’s a good point about smoothing dividend payments. I’m not sure about quarterly payments, I guess that would be nice if I were living off the dividends, but I can certainly see the sense in having the two be far more equal. Not sure what the reasoning is on the current lopsided approach. I can’t imagine it’s because the board doesn’t have the information on cash flows needed to decide on the dividend until the end of the year. Surely they have information on cash flows fed to them almost in real-time (the executive directors at least).

      I lieu of changing the dividend behaviour of giant corporations, a good way to smooth out income from dividends is to have a “buffer” of perhaps a year’s income and to draw a fixed, sustainable amount from that while the lumpy dividends fill the buffer back up in fits and spurts.

      1. I agree, the unequal semi-annual distributions does seem very peculiar. Some companies do provide more equalised payments (BHP Billiton comes to mind).

        There does seem to be a slow shift towards quarterly payments amongst some companies. Obviously, in the case of my own holdings Imperial Tobacco have just started doing so. But even then, they have kept the previous unequal distribution but just spread it across quarter rather than half year distributions! Very odd behaviour!

        It is an interesting thought that maybe UK investors find dividend investing less attractive due to semi-annual rather than quarterly dividends. Would be fascinating to discover if that was true or not. I wonder if anyone has researched into it…

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