Fifteen favourite fallacies

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14. I can't sell because of the tax bill

A skilled private investor - let us call him Peter - once built up a portfolio worth over £1m from very modest beginnings in the course of about 40 years. By 1996, over £100k of that consisted in a single holding in Danka Business Systems, which had multiplied severalfold from his purchase price. Peter believed the shares were "pretty fully valued", but didn't dare sell, "because of the capital gains tax liability".

The following year, Danka made a disastrous acquisition. The shares slumped from a high of 848p to under 200p on a profit warning, en route to a low of 28p. They still stand below £1. Had Peter sold before the warning, it would have cost him 40% of his profits. But hanging on till after it came cost him 75%.

This true story illustrates how easy it is to set a psychological trap for yourself, if you are fortunate enough to make a large taxable gain. If you regard a share as fully valued at 100p, presumably you will think it undervalued when it falls to 80p, absurdly cheap when it crashes to 50p, and so on - until you have made a thumping loss instead of a profit. Granted, you will have avoided paying CGT. But it is you, and not the Revenue, that has really lost out.

Never allow tax considerations to influence your buying and selling (though they may well determine whether you hold an asset in a tax-free vehicle such as an ISA). Always act in accordance with a predetermined investment strategy.

If you do need to minimise the CGT on a large gain:

1. Make full use of your own and your spouse's CGT allowances (currently £10,000 per person). If you are married, and sell just either side of April 5th, you can realise £40,000 of profits in this way in two days without any tax liability.
2. If necessary, sell some losers and realise further profits, which you offset against these losses in your tax return. This will have the doubly beneficial effect of avoiding CGT and taking you out of poor performing shares before their performance gets any worse.

1. "Investing is just gambling anyway, so why not take a few chances?" 2. "You've got to speculate to accumulate" 3. "Growth always wins in the end/Value always wins in the end" 4. "Blue chips are best/Smaller companies are best" 5. "Penny shares are the best value for money" 6. "It's such a great company, I can't go wrong" 7. "But just look at the dividends" 8. "I've got to be in technology/biotechnology/telecoms etc" 9. "I missed that one, I'll catch the next one" 10. "Paper losses aren't real" 11. "I'll never go broke taking a profit" 12. "It can't possibly go any lower" 13. "It can't possibly go any higher" 14. I can't sell because of the tax bill 15. "This time it's different" 16. Conclusion

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