Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
Your startup investment (or stock) has performed well, yielding double-digit (possibly triple?) returns. Do you cash out now, or should you hold in anticipation of further returns? Imagine you bought Amazon stock on the NASDAQ in the aftermath of the 2008 Financial Crash, at which point it was valued at around $4. Two years later, you might have a 100% return with the stock now at $8. Three more years, in 2013, it stood at $20. Only five years afterwards, it reached $100 – returns, literally, in the thousands from your original $4. Of course, hindsight is a beautiful thing. Who could have predicted Amazon’s success, especially when many UK tech stocks had taken such punishment in the Dot Com Bubble?
Investors, of course, are stuck with imperfect information in the present, unable to accurately assess the future with precision. Yet how can you maximise your judgement when deciding on whether to hold or “cash in” on an investment? Below, our investment team at Bure Valley Group offers some ideas. We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
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Factor your time horizon
Imagine your intended investment period is very short – e.g. less than a year. In which case, you might sell a stock as soon as it generates a respectable gain (e.g. 10%), or if you suddenly need the money – perhaps for a better investment opportunity. However, those with a longer time horizon, such as decades, can likely afford to hold through market downturns and corrections. Investors need to be careful, however, when selling company investments after they have gone up in value. With your “best” shares gone from your account, your remaining portfolio may look quite “weak” – comprising stocks that have plateaued or fallen in value. This can be difficult for investors to look at, perhaps leading to irrational decisions such as impulsively buying a “quick win” stock (which subsequently falls in value), or selling other shares to “cut losses” before they have a chance to recover.
Factor in your portfolio strategy
If you need to adjust your portfolio due to your asset balance veering off course (due to varying performance), then this can be timely for selling a startup investment or stock. Perhaps you are now over-exposed in a specific region, country or sector. Selling some lower-priority shares that have performed well could help redress the imbalance. Maybe a life event such as retirement, marriage or divorce has changed your asset base, requiring action to ensure an appropriate level of diversification. Sometimes, cashing in an investment can help to free up capital needed to settle a court case, finance a new business or pay for a medical expense.
Know when to cut your losses
It can be difficult to know when to remain committed to an underperforming investment and when to cut your losses. No investor likes to admit that they made a mistake. Your approach here will heavily depend on your philosophy. Value investors, for instance, might be happy to buy a stock as it falls in price. After all, this presents an opportunity to buy it “on the cheap” before the market recognises its fair value again – leading to an eventual rise in price (at which point, the investor could cash in at a profit). Other investors will have a self-imposed price floor for different stocks in their portfolio (e.g. -7% or -8% down from the purchase price). To avoid impulsive and irrational decisions, investors may do best by picking an investment philosophy and sticking to it.
Review your investment thesis
Do your initial reasons for buying a stock, or shares in a private company, still hold true? Have the prevailing economic conditions changed so that certain assumptions can no longer be relied upon (e.g. sales growth)? An investor should have a thesis behind each investment in a portfolio – outside of just wanting to make a profit. Do you still strongly believe that cloud technology will play a key role in the global economy in the coming years, for instance? Is the UK still a friendly commercial and regulatory environment for startups to thrive in? It might be that your thesis for different investments needs updating, potentially impacting your decision to hold or sell.
Know your natural exit point
Early-stage investors will likely already have a range of plausible “exits” in mind when investing in a startup. If these conditions come about – e.g. an announced acquisition – then you have now reached your goals. Unless you wish to remain involved (and the business founders may have a different idea of what this could look like), this could be a natural point to sell and put the profits to work elsewhere. Another consideration is your tax position. For instance, if it is near the end of the financial year (e.g. March) and you still have some remaining Annual Exempt Amount to generate tax-free capital gains (outside of an ISA), then you may wish to offload some shares in businesses that are at – or almost at – your target price.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827