“Run a profit, cut a loss”: Should investors be thinking about taking their money out of the market?

Stock market old hands have a saying: “Run a profit, cut a loss”. The idea is that while it might sometimes feel tempting to cash in an investment after a good run, you’re better off holding on to it for future gains – whereas loss-making positions should be dispensed with ruthlessly, rather than held in hope of a recovery.

It’s not a bad adage to bear in mind as the UK stock market hovers around its all-time high. With the FTSE 100 Index of shares in Britain’s biggest companies now above 7,000 – a level it couldn’t breach at the height of the dot.com boom in 1999 – investors could be forgiven for feeling a little nervous. Should you take your money before the market turns, especially given all the financial and economic uncertainties in the wake of the UK’s vote to leave the European Union?

Invest, don’t speculate

The short answer is no – and for two good reasons. First, while you will find stock market pundits out there who fear the rises of recent weeks are unsustainable, many analysts point out that UK shares are not trading on particularly demanding valuations. What they mean is that companies mostly have the earnings to support the share price rises we have seen.

Much more fundamentally, however, investment isn’t about trying to second-guess how markets will move day by day – if you have stock market investments, it’s because you see them as the best vehicle for achieving your long-term financial goals. Playing the markets is speculation, not investment, so stick to focusing on your objectives.

Deviating from your long-term plans can prove expensive. Figures published this week by Fidelity Investment reveal that someone who had invested £1,000 in the UK stock market 30 years ago would have made an average annual return of 9.22 per cent since then, amassing a total of £14,117. But if they’d missed just the best 10 days of stock market performance over that 30-year period, their annual return would have slipped to 6.93 per cent, for a total of only £7,484.

This is not to say you should do nothing in response to the market’s rise. It may now be time to rebalance your portfolio, since the rise of the stock market compared to other investments – or even the rise of UK shares compared to other markets - could now mean you hold more of your money in these assets than you intended. But selling some of your shares to readjust would be sensible portfolio strategy rather than speculation.

Regular savings

How, then, to go on investing in the stock market as we move forward? Well, the regular savings plans offered by many investment companies are an excellent way to drip-feed money into the stock market on a monthly basis. These plans allow you to save as little as £25 a month, building up your holdings over time.

The advantage of this approach, particularly during periods of stock market volatility, is that investment company regular savings plans benefit from a statistical phenomenon known as pound-cost averaging. In simple terms, your fixed monthly sum buys more shares in months when prices have fallen, taking advantage of volatility to boost the size of your holding. Over time, this can help smooth out the ups and downs of the market.

Finally, the stock market rises we’ve seen recently are a reminder of the value of tax-free individual savings accounts. ISAs not only protect your savings and investment income from tax, but also the profits on all assets held within them are tax-free. While all taxpayers are entitled to earn a slug of profit each year without any liability to tax, the capital gains tax allowance - £11,100 in the 2016-17 tax year – may go very quickly during periods of strong growth. The tax only applies if you cash in your investments, but ISAs will shelter you from a bill.