I Lost £45k Selling Rolls-Royce Shares Too Soon: What Now?

In May 2023, I made what has turned out to be the most painful investment call of my life so far.

Back then, my money was spread across a relatively small collection of UK shares, including Lloyds Bank, HSBC, BAE Systems, Rolls-Royce, Aviva and Persimmon.

I knew my investment portfolio was not especially well diversified and that I was relying heavily on the performance of a handful of FTSE-listed companies.

Trying to take a more sensible, long-term approach, I sold my holdings in Rolls-Royce, Aviva and Lloyds Bank and moved the money into a single global index fund.

The decision still stings. I sold Rolls-Royce shares at 148p, while the price has since climbed to more than 1,500p. My stake was worth about £5,000 when I sold; today it would be worth in excess of £50,000. By comparison, my world index fund has gained a little over 40 per cent.

That experience has made me question whether index fund investing is really right for me. I would be keen to hear what This is Money, or the fund managers you speak to, might suggest when it comes to individual companies with the potential to deliver a Rolls-Royce-style share price surge.

I fully understand the risks and accept that I could lose the lot, but I have reached the point where I feel life is too short — and I would rather invest for excitement as well as returns.

Ed Magnus of This is Money replies: You might regret selling your Rolls-Royce shares given how much it cost you over the long term, but it was arguably a perfectly reasonable decision to make at the time. 

In May 2023, nobody could have predicted that the aerospace specialist Rolls-Royce would become one of the best-performing stocks globally – even surpassing the likes of Nvidia over the last five years.

In fact, many investors who bought and sold shares in Rolls-Royce between 2013 and 2022 will have likely done so at a loss. 

During that time, the share price was trending downwards from a high of 437p in 2013 to a low of 65p in 2022, albeit with the usual ups and downs along the way.

Trying to time the market, and particularly the rise and fall of individual companies, requires knowledge, research and bucketloads of luck.

So unless you are the type of person who enjoys reading everything there is about a certain company, including trading statements and annual reports – plus having to understand the wider context around its sector and competitors – sticking to classic index funds will likely serve you better in the long run.

Even the great investor Warren Buffett thinks most people are better off sticking with broad, low-cost index funds.

But given you seem to prefer the thrill of stock picking – and are fully aware of the risks that entails – we decided to speak to Tom Matthews, fund manager at the JOHCM UK Dynamic fund, to see what he might suggest.

Is there another Rolls-Royce out there for this investor?

Tom Matthews replies: What was wrong was the specific stock you sold. Hindsight shows many investors appear to have underestimated the scale of Rolls-Royce’s operational recovery and earnings potential. 

Successfully executed corporate turnarounds can create significant shareholder value by unlocking new growth opportunities, and they almost always occur after a period of sustained underperformance – precisely when markets are most fearful.

Falling share prices create significant behavioural biases. Even when businesses are being successfully transformed, the market often ignores these changes due to loss aversion. 

The good news is the UK market still contains a number of globally leading businesses executing a transformation, which some investors believe are not fully reflected in current valuations. 

Examples of such companies include WPP, the world’s leading advertising agency, Johnson Matthey, a world leader in platinum group metals and the drinks giant Diageo.

There is also IG Group, the world leader in spread betting, and Pearson, the world-leading education provider. 

All of these businesses are undergoing significant change which could unlock improved future cash generation and potentially support valuations if executed successfully. 

Did this investor make the correct decision at the time? 

Beware ‘seller’s remorse’ and ‘resulting’ – a term for judging the quality of a decision based solely on its outcome. 

The anguish of watching a stock rise tenfold after selling it is enough to challenge the judgment of even the best investors. 

However, we cannot change the past; we must focus on improving the future. 

Successful investors continually learn by objectively identifying what was right or wrong with their investment process, avoiding the behavioural biases associated with focusing solely on the end result.

Diversifying your portfolio was actually the right decision. The UK only accounts for a sliver of total global equities and has close to zero technology exposure, so this allocation added vital balance to your portfolio. 

This is demonstrated by your 40 per cent return, which ranks well above historic norms for a balanced global equity portfolio.

Why has the Rolls-Royce share price done so well? 

In May 2023, Rolls-Royce’s share price had collapsed for a decade; it had undertaken a highly dilutive rights issue, and there were severe post-Covid concerns over global air travel. Fear levels were exceptionally high.

What the market missed was that under a new chief executive, the operational turnaround was accelerating, commercial terms had been renegotiated, and, with a repaired balance sheet, this globally leading engineering business was re-allocating capital to exciting new growth areas such as Power Generation (used by data centres), Defence, and Small Modular Reactors (SMRs) for nuclear power. 

It appears that the market placed too limited a value on these opportunities at the time. 

These new growth areas have been among the factors supporting the company’s recovery and share-price performance, alongside a significant inflection in the business’s cash-generating profile and a subsequent re-rating of the stock.

If you have an investing question, please email ed.magnus@thisismoney.co.uk.