This post is drawn from a topic posted in the Suggest a Topic page, but the original comment wanted a convincing answer to this question, and I don’t think I have one, but I’ll still attempt to address the question with some thoughts I do have.
First, here is the comment.
I like your articles very much â€“ they are very informative. Keep up the good work!
I have a query â€“ please try to give a convincing answer if possible.
I invest in mutual funds by SIP only and in stocks directly. My SIP in mutual funds are for long periods â€“ ten to fifteen years. I have read a lot on rupee cost averaging and the power of compounding but I am not convinced whether I should let a SIP in a particular MF run for so many years or book profits in between. I review my portfolio every six months. What if the SIP
ran for so many years and finally the MF performance plummets as it happened to
SBI MSFU Contra and Reliance Growth funds? I had been investing in these MFs for the past five years but feel that I should have booked profits earlier.
I touched upon this topic nearly 3 years ago in a post titled Buy and Hold. And Sell?.
If I were to write that post today I would get rid of the question mark. I wrote the following thing in that post:
Donâ€™t forget to sell
Calling a market top is almost impossible, but it is fairly easy to see when markets over-heat. Instead of holding on to stocks perennially, you should sell, when the market is over-heated. There is no reason tonotÂ do this.
When stock prices reach levels that do not justify the earnings of the companies they represent, there is no reason to hold on to the stocks. You should convert your stocks into cash in such times.
From 3 years to now – that conviction has only become stronger – the only thing that surprised me was the speed with which the market turned after the crash. While buying stocks during the ultra depressing time of late 2008 and early 2009 – I used to think that it might take a few years for the situation to get stabilized and earnings will grow then and as a result the stock prices will grow as well.
The turn came much sooner, and then the markets fell this year as well although the fall is not even 20% YTD – all the gloom and doom stories make it sound much worse.
I think when you are sitting on fat profits you should book some of it especially when your postman starts giving you stock advice.
You can take that money to meet major expenses or put some of it in debt instruments to take advantage of high interest rates like you see today, or keep stashing the cash so that you can take advantage of getting in the market when it crashes the next time.
All of these things are much easier said than done, and a lot of it depends on your own conviction and confidence about what you are doing. There is a reason why everyone sells in a panic and buys during euphoria.
You can see this around you now when the Sensex is down almost 20% YTD – how many people are really buying aggressively?
But ultimately, I think you want to be at the place where you are confident in making decisions to book profits, and also increasing your equity holdings during time of distress, and of course knowing the rationale behind it. You don’t want to just buy because there is distress.
I bought equities aggressively in late 2008, early 2009, and that’s what I’m doing right now. Not everyone will think it’s the right thing to do because of their confidence in the market, need for cash in the near future, or even opportunities and I can certainly understand that.
Those are my thoughts, I don’t for a minute think they are “convincing” because I think it’s one of those things that is a lot harder to do than to talk about – if it weren’t – everyone would be doing it.