I’ve previously written about the importance of staying fully invested in all circumstances. An investor should keep cash in his account to pay for everyday expenses as well as for any unforeseen situation – the loss of his job, the replacement of his heat pump which suddenly died or for medical expenses. A cash balance equivalent to six months of expenses seems adequate to me.

But for the long-term investor, I would keep the bare minimum required in cash in an investment portfolio. If the objective is to grow this portfolio, it is not by maintaining a high percentage of cash that we will achieve our objective.

This is what we do in our portfolios under management at COTE 100.

The problem with such discipline is that it makes the decision to buy a new stock difficult. In fact, the decision to buy a stock is automatically linked to the often very difficult decision to sell one from our portfolio. It’s easy to buy, but much harder to sell!

I nevertheless believe that such discipline is advantageous for the investor because it requires him to limit his stock market transactions. If a new stock is not significantly more attractive than the least attractive current stock in one’s portfolio, the purchase (and sale of an existing stock) should not occur.

However, it can be difficult to choose which stock to sell to buy another. Nobody knows the future and we all feel this fear of selling a stock just before it makes significant gains on the stock market.

In my opinion, one question should dictate our decisions (those of buying a new stock and selling an existing one): Where will a company be in 10 years.

It’s not an easy question, but asking it forces us to think about the long-term prospects of a company and its industry. Is its business model sustainable? What are the risks of substituting a company’s products or services? Is one company more likely than another to be disrupted by future technological advances?

In my opinion, it is primarily these questions that should dictate a long-term investor’s buying and selling choices.