We begin a new financial year with many S&P/ASX 200 Index (ASX: XJO) stocks hitting new all-time highs, or sitting just below their recent peaks.
Over the past few weeks, investors have been laser-focused on tax planning for FY25.
Given the strong performance of the ASX 200 Index in FY25, it's likely that many investors were sitting on substantial capital gains.
The ASX 200 returned nearly 10% in FY25. However, there were several ASX stocks that returned more than 50% for the year. Within the mining sector, Evolution Mining Ltd (ASX: EVN) rose 129%. Meanwhile, technology company Life 360 Inc (ASX: 360) gained an impressive 101%. The talk of the town, Commonwealth Bank of Australia (ASX: CBA), also went close, returning 47% in FY25.
While investment decisions should be kept separate from tax planning, it's possible that investors who were sitting on large realised capital gains may have deferred the sale of some investments to the new financial year.
Tax on investment gains is paid at the taxpayers' marginal tax rate. So, crystallising profits in the new financial year may put them in a lower tax bracket. Delaying a sale by a week or so might reduce the amount of tax paid on those capital gains, with little risk of dramatic share price movements occurring in the meantime.
Now that we have entered FY26, those investors may be wondering whether it is time to cash in on some profits.
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Pros and cons of selling your winners
There are several valid reasons to sell ASX 200 stocks after their share price has peaked.
The most obvious one is for valuation reasons.
When a company is trading well above its historical price-to-earnings ratio (P/E), this is usually a sign that it is overvalued. In this case, it is usually wise to cash out and switch your capital to a more attractively valued alternative.
This is especially evident in the case of CBA, which is trading at a P/E ratio of 32, twice its historical trading range of 16.
However, investors shouldn't just sell out of an ASX 200 stock simply because it has peaked.
As put by one of the world's most successful investors, Peter Lynch:
Selling your winners and holding your losers is like cutting the flowers and watering the weeds.
Great companies can deliver record performance over a very long period of time. Especially those that are small or medium-sized, which can continue taking market share from competitors, or exist in a growing market.
Two examples
For example, starting out as an online bookstore, Amazon.com Inc (NASDAQ: AMZN) has been able to grow revenue and expand its market share over several decades. It has changed the way we shop and live, strongly rewarding investors along the way. Today, the Magnificent 7 company is sitting just below its all-time high. It would have been a mistake to sell out at any point along the journey, despite the company setting new all-time highs on a regular basis.
Within the ASX 200, healthcare juggernaut Pro Medicus Ltd (ASX: PME) has a similar story. The company has delivered a long-term revenue growth rate of above 30% and is up more than 10 times in the past 5 years alone. Last week, the company reached a new all-time high of $316.47 after securing new contract deals. After capturing just 9% of its total addressable market in the US, Pro Medicus still has a long runway of growth ahead of it.
The power of patience
Many investors often feel the urge to rebalance their portfolio on a regular basis.
While many investors like to think of themselves as 'long-term investors', very few are able to stick to it in practice.
The average holding period for shares has decreased dramatically over time. According to Visual Capitalist, the average holding period for New York Stock Exchange-listed stocks in 2020 was just 5.5 months. That's down dramatically from the 1950s when it was eight years.
However, the most successful investors are those who can hold high-quality companies for long periods of time, allowing compounding to do the work.
Take it from the late Charlie Munger, who knew a thing or two about investing:
It's waiting that helps you as an investor, and a lot of people just can't stand to wait. If you didn't get the deferred-gratification gene, you've got to work very hard to overcome that.
Foolish Takeaway
In a fast-paced world with a 24-hour news cycle, investors are never short of reasons to sell out of their investments. Whether that be a bad jobs report, experts' recession forecasts, or the latest Truth Social post from US President Donald Trump.
Investors often sabotage their returns by acting on these impulses and selling out early. However, history has shown that true wealth is built by practising patience and holding high-quality companies long term.
