When is it time to cut my losses?

My holdings in Naspers and Clicks have performed well through the ups and downs of the market. However, there are other shares in my portfolio that have been lagging for years. How do I know if it’s time to cut my losses?

Name withheld

Anet Ahern, the chief executive of PSG Asset Management, responds:

A popular myth holds that if you buy shares in good companies and hold them long enough, you will make money. For example, the compelling narrative behind big tech has driven the prices of these shares to extreme valuations, apparently proving this point.

But the “share prices of good companies only go up” narrative is not always true. Pay too much for your initial investment based on valuation, and you are likely to wait a long time to see growth on your investment.

There are costs to buying into prevailing narratives, and those who are serious about building wealth in the long term will realise that a sound investment strategy has several facets.

Avoiding a share simply because its price has not performed “well”, or selling it because it has “not done as well” as some others, is a precarious strategy. At any given time, a well-structured, diversified portfolio will have parts that are working and parts that are lagging.

The best investment decisions are based on a sober assessment of fair value, and they take various future scenarios into account, knowing that things rarely pan out exactly as predicted.