How to stay ahead of market highs

“Run a profit, cut a loss,” is one of those sayings by which grizzled stock market professionals claim to live their lives. The idea is simple enough: you’re supposed to keep your money invested while it’s climbing in value rather than trying to second guess when the market might turn; and when you do start to suffer setbacks, you must be disciplined about getting out before a small loss turns into a large one as you wait for a bounce-back.

In the current stock market environment, this piece of advice is worth remembering. The UK stock market rose by more than 20 per cent during the first five months of the year, repeatedly hitting new highs. Other global stock markets have also posted strong performances. However rational those old stock market adages might be, many investors will be tempted to take some profits while the going is so good.

Be an investor not a trader

If that’s how you’re feeling, however, tread carefully. The first point to make is that if you’re investing in the stock market – probably through collective funds including investment companies – as part of a long-term strategy of financial planning for the future, market timing isn’t a game you should be playing. Your aim is to build up a savings pot for many years in the future, rather than to focus on what might or might not happen next week or next month. That’s what traders do, rather than investors.

This isn’t to say you should sit on your hands following a good run of market performance. Part of the job of being an investor is reviewing your portfolio regularly – say once or twice a year – to make sure it’s still fit for the purpose for which it was designed.

To that end, rebalancing can be an important exercise following a sustained period of strong investment returns from one asset class. Let’s say that you started the year with a strategy based on the premise that given your attitude to risk and investment objectives, equities should account for 50 per cent of your portfolio, with the rest split between other assets, such as bonds and property; since equities have outperformed so strongly this year relative to other assets, they will now account for quite a bit more than this. In which case, top-slicing some of your stock market holdings to reinvest elsewhere in your portfolio makes sense.

Keep it regular

So if the first part of the old saying is worth sticking to – the advice about rebalancing aside – what about the second half? Should you cut and run when markets start falling?

Here the answer is no, assuming you’re focused on those long-term goals. While short-term market movements in either direction inevitably feel like a big deal when you’re in the middle of them, especially if they’re sizeable, you’ll struggle to spot them on any long-term performance chart.

In fact, regular saving continues to be one of the best ways to invest in these market conditions. The regular savings plans run by many investment companies allow you to drip feed small amounts of money into the market each month – often as little as £25 or £50 – so that you keep adding to your investments.

Such plans can work very well if the market’s progress does falter. In months when prices are lower, your fixed cash investment buys more shares in the investment company, so you get a bigger gain when the recovery comes. This statistical effect, known as pound-cost averaging, can be really beneficial during a period of market volatility.

In the end, it’s all about taking the long-term view. Be disciplined and keep your investments under review in the context of your attitude to risk and your investment goals – but hold your nerve and follow the professionals’ advice, at least when it comes to running a profit.