“Investors have lost much more money trying to predict corrections than they have in actual corrections.” - Peter Lynch
This well-known quote by Peter Lynch—one of the most successful investors and fund managers of all time—highlights the dilemma many investors are currently facing. Whether to book profits now or wait for a correction to reinvest as the Indian stock market continues to set new highs? While markets around the world are falling, things are different in India. The Sensex reached record highs in December. It displays the persistence of the nation's retail investors. SIP contributions into mutual funds increased to over Rs 13,000 crore in October 2022.
But Sensex reaching new highs is only a headline. Remember that Sensex was at 100 when it began in 1979 and will one day reach 100000 as well.
The debate of whether to take profits now or wait for a correction to reinvest continues. Let me share some insights in this column to help you make an informed decision.
Try not to time the market because there are far too many factors at play for anyone to be able to forecast what will happen. Investors are prompted by market highs to decide whether to postpone investing. Or to sell mutual funds and stocks and reinvest the proceeds when the market declines.
Although the phrase 'buy low and sell high' seems like a great investment strategy, it only holds in theory because timing the markets is impossible. However, one should only do so if they claim that they can time their entry and exit. Very few people—if any—can do this flawlessly.
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Furthermore, thinking you can time the market and always make investments at the right time is a delusional notion. According to my 17 years of experience, as well as the confirmed similar experience of many stock market investors, waiting for the best investment opportunity by holding onto your money may cause more harm than good. In reality, when the BSE Sensex touched 50000 last year, many investors booked profits and stayed out, believing that it would correct. They have been waiting on the fences since, and now Sensex has risen past 60000. Most of them are finding it difficult to enter the market. Always remember that being in the market is easier than being out of it.
No, one should regularly do a comprehensive review of their portfolio and take appropriate action as needed. However, there are situations when doing nothing also translates as taking an action. For example, sitting back and allowing your portfolio to run its course. It can be extremely risky to build wealth by staying out of the Indian stock market if you do not take advantage of the enormous growth our country will see over the next 8 to 10 years.
There is a lot of capex happening across industries, corporate earnings in India are at their peak point in a long time, and general confidence is at an all-time high. Within the next five years, India's economy, which is currently the fifth-largest in the world, would move up to the third position. It is expected to reach $5 and $10 trillion in the next five and ten years, respectively. It is also projected that India will become the third-largest stock market worldwide in the next seven to eight years.
According to the NSE whitepaper, someone investing in the NIFTY 50 index with a 5-year or longer time horizon has never experienced a loss based on a daily rolling return study of the index's performance over the past 19 years since June 1999. For a longer investment horizon of 7 and 10 years, the NIFTY 50 index has delivered an annualised return of more than 15 percent per annum for 48 percent and 60 percent of the time, respectively.
When the Nifty was launched in April 1996 at 1,107 points, the base year was November 1995 (1,000 points). Nifty took around 17 years to achieve 6,000 points but just nine years to reach the subsequent 12,000+ points. After 26 years of existence, the Nifty finished at 18,420, a gain of more than 18 times.
1) Better alternative: If you do not have a better investment alternative for the money you receive, what would you do with the money you receive on sale? Find an alternative investment plant. Otherwise, you might miss out on the potential upside your stock will offer.
2) Rebalancing portfolio: Book profits only if your portfolio has to be rebalanced or diversified. Transfer funds between different asset classes. When rebalancing, keep taxes in mind.
3) Use your surplus cash: Instead of selling stocks or equities mutual funds to reinvest later, one should always have some cash on hand. That is a more prudent approach if the stock market falls.
4) Target price: Do not sell stocks simply because they have increased in price unless your target price has been met. Remember, it can go higher and that is why you have invested in it. Do not sell until you have met your target or financial goal related to the investment.
5) Continue your SIPs: They are beneficial since they reduce the stress associated with market timing. Rupee cost averaging, which SIPs offer, enables a fixed sum of money for regular investment, regardless of the state of the market.
6) Get rid of your bad investments: Selling your market highs can be a terrific opportunity to identify and correct any bad investments you may have made.
7) Sell when you have met your target earlier than expected: When you're coming closer to your financial goals, it's a good idea to sell equities positions for a profit and invest the profits in fixed-income investments. However, it is best to plan to withdraw money from equity for at least two years before accomplishing any financial goals.
The author is a Chartered Accountant and founder of NRP Capitals.
The thoughts and opinions shared here are of the author.
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