When should you call time on your investments?

Investors are often told to cut your losers and run your winners. Is there any truth to the old adage? Matthew Partridge investigates.

Investors are often told to "cut your losers and run your winners". It makes a lot of sense. Many studies show that stocks, both individually and collectively, exhibit positive momentum. This means stocks that rise in price are more likely to keep rising, and vice versa, especially in the short term.

Indeed, Frank Fabozzi of Yale University found that a strategy of buying the best-performing shares and selling the worst generated average excess returns of 1.3% a month between 1995 and 2003. But running winners and cutting losers particularly the latter is easier said than done. We tend to be too keen to take profits, and too reluctant to crystallise losses. One way to get around this is by using stop-losses setting a price at a point below your buying price at which you will automatically sell up and take your losses. But does it work? And where should you set your stops?

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Dr Matthew Partridge
Shares editor, MoneyWeek

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri