Is it a good idea to stay invested in an ASX share after its share price goes on a strong run?
I think the decision to sell is a much harder choice than buying. Buying is usually pretty easy – you just pick an investment you think could do well over the long-term.
But selling is a lot harder. When is the right time to sell something? It may be a simpler thought process when something has gone wrong – when your investment thesis is broken you should probably move on.
What about when a share performs really strongly over a relatively short period of time? Should you lock in those gains? Should you buy low and then “sell high”?
We’ve seen a number of digital ASX shares perform really strongly after the COVID-19 impacts. Businesses like Kogan.com Ltd (ASX: KGN), Temple & Webster Group Ltd (ASX: TPW), Redbubble Ltd (ASX: RBL), Nextdc Ltd (ASX: NXT), Data#3 Limited (ASX: DTL), Megaport Ltd (ASX: MP1) and so on have done great.
I don’t think we’re on the verge of a dot com crash with these types of businesses. They are all generating real growth of customer activity and revenue growth.
Here are three big reasons why I think you should keep holding these types of big winners:
I don’t think enough investors give much thought about tax with their investment decisions.
If you’ve done really well with an investment and go to sell it, you’re likely going to have to pay tax if you crystallise that gain. The higher your marginal tax rate, the more you would have to pay in tax if you sold a winner from your portfolio.
For tax reasons alone, I think it makes sense to let your winners keep running.
We all need to pay our taxes, but I don’t think you should cause any capital gains tax events if you can help it, as it would reduce your portfolio balance and hamper the compounding of your wealth.
Winners keep winning
Think about some of the best sports players or sports teams. Think about the best musicians, actors or investors. They may not be perfect every single year, but they have a habit of producing and outperforming most years over the long-term.
I think you can see similar things with businesses. Companies with strong management, a strong product or service, a strong brand – they tend to keep on winning.
Think about businesses like Altium Limited (ASX: ALU), REA Group Limited (ASX: REA), Goodman Group (ASX: GMG), Pro Medicus Limited (ASX: PME), CSL Limited (ASX: CSL), Magellan Financial Group Ltd (ASX: MFG) and so on. It’s these types of ASX shares that have strong long-term visions and keep executing their strategies very effectively.
Why would you want to sell one of the best businesses on the ASX out of your portfolio?
The smaller, digital businesses that I named earlier – ones like Redbubble – still have long-term growth potential. It could be a big mistake to think that FY21 is going to be the last year of exceptional growth. Compounding profit growth can be a great wealth-builder for our portfolios.
If you did decide to sell, you could have another major difficulty.
Where else will you invest?
It’s hard to find a winner. The odds of choosing another winner, at the right time/price (after paying tax), make it even harder to hop from one successful investment to another.
How many wonderful opportunities are there on the share market right now? It’s hard with many of the most promising growth shares now priced fairly highly.
If you still think your underlying business has good long-term profit growth potential, then I think it’s worth holding onto winners. The low interest rate environment has pushed up a lot of asset prices. The alternatives to (ASX) shares don’t look good to me. I’d stick with the best ASX shares and ignore short-term worries.
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Returns as of 6th October 2020