This is a normal question for me nowadays, especially by Investors who had invested in the March’2020 Fall. For other investors who have been investing for quite some time, the recent market upside has led their portfolio to recover and have made their long term investments look better as per the expected returns.
Whenever I have this feeling that investors are getting wise and disciplined in their investments with no one watching the markets, then any big movement, either way, raises such questions again – Should I book profits or cut losses?
I guess this is where the major role of an advisor comes into the scene, to help clients reassess the situation and make them understand how this will impact their portfolio, and why they should look at the broad picture always.
In the falling markets, every second investor would like to know the right time to exit the investment just to cut losses, and on the rise, every third investor would like to book profits as they have had the bitter experience of the fall or long lull and thus they want to avoid the bad taste again. Why am I saying every third Investor, because first and second ones do not have the patience to wait for so long.
I have met 3 such persons in the recent past. One was lucky enough to start with the Investment in the month of March’2020. The second person took the Risk of Switching more into equity in March’2020 (Of course with the lure to earn more and faster), and the third one has been a Regular SIP investor whose portfolio was showing 3% CAGR in Feb and 10% CAGR in Nov’2020.
No points for guessing that the First and Third one was following the Asset Allocation and the middle one was taking chances.
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But all three were asking the same question now. Is this the right time for profit booking? What do you say?
However, there are some others who also were like second investors and have got so excited with the Market rise that they now feel to sell their house and increase equity exposure.
The reason for their view is also very clear since they have never experienced any fall, and neither has seen any long slowdown, so to them, equity is all about making money fast.
After seeing so much of the stock market in the last 17 years, neither upside excites me nor downside scares me. But what keeps me busy is my clients’ reaction to all this rigmarole. Taming their behavior, re-establishing their reason for investments, and reinforcing the process to follow, is what my job is.
Medicines will do their job if you take them in the prescribed dose, in advised intervals, and for a required tenure. You cannot expect to recover immediately after taking your first dose; and nor does the fast recovery mean that you should increase your dose. Doctors know it very well, so you recommend Rest and a good diet along with the medicines, as most of the time the cure has to come from a calm mind, and then only the body will respond.
So does the advice on investment come from an adviser (not a seller). Booking profits or losses have to be backed by reasoning, though investors have lots of emotions attached to their investments, my reply as always has been to look at the bigger picture.
There could be 3 reasons why and when you should have a look at your Portfolio valuation and take action- whether profit booking or cutting losses.
To Rebalance Strategic Asset Allocation: For those who follow the Financial Planning route and thus have Strategic Asset Allocation at the place, this may be the time to rebalance their portfolio.
Rebalancing will make them book profits from the performing asset class, and also help them follow the buy low sell high formula. So, it’s a bigger version of profit booking.
But here again, the emotions may come into the scene as after booking profits from one asset you do not feel like adding the other which is not doing good currently.
Tactical Allocation: If the equity purchase was a tactical call, and the purpose has achieved, you may go with profit booking. But do remember that true and good investing is always goal-oriented and such adventure may prove to be fatal if you get habitual to this.
Goal Achievement: If you are near to your goals, then you should not look at the market valuation. Just redeem your investments and provide for the important goals. Be this resulting in booking profits or Losses. Nothing would give you more happiness than the achievement of your financial goals.
See, Profits and Losses both are temporary and are part of the Investment movement. There has to be some specific reason to take action on your portfolio. Your investments should give you peace of mind and not take away whatever peace you are left with this in today’s kind of complicated life.
So, when your medicine has given you relief, that does not mean you should increase your dose, and the opposite is also true that when it is not helping you in the treatment, you should give this required time.
Like medicines, investments also have a minimum tenure you should keep them for. But if that is bothering you so much, then it’s time to reconsult your doctor (financial planner)!