A question which investors frequently ask is: When to sell? Buying is easy. Long-term investors can always buy high quality stocks at any time if the valuations are not excessive. Systematic investment, particularly SIPs in mutual funds, is always good irrespective of the market levels. Lumpsum investment can be highly profitable when made during a bear phase when valuations are low.
But, when to sell?
There is no simple and straightforward answer to this question. The answer depends on the financial goals of the investor. If an investor has made an investment – lump sum or systematic – for the realization of a financial goal, say, education of children or buying a house or buying a car or going on a vacation, and the investment has appreciated enough for the realization of that goal, certainly the investment can be redeemed. After all, money is a means to an end, not the end itself. On the other hand, if an investor had invested for long-term wealth creation, it is important that she remains invested. Selling just because the market has appreciated beyond expectations doesn’t make sense. Experience tells us that it is very difficult, almost impossible, to time the market. So, the best strategy would be to spend time in the market rather than making futile attempts to time the market. Selling when the market appears to be high, with the intention of reentering when the market corrects, is a highly risky strategy. More often, than not, the market surprises – both on the upside and downside. Missing out on the best days can prove to be very costly.
A study conducted by First Global is hugely significant. The study shows that in the 40-year journey of the Sensex, when the index moved up from 100 to around 44000, if the investor had missed out on the best 30 days (in 40 years), the returns would be down by 90 percent. That is, investment of Rs 100 in 1979, instead of compounding from 100 to 44000, would have risen only to 4000. If the investor had missed out on the 10 best days (one day in four years), the Rs 100 investment would have compounded to only Rs 15000; so, two thirds of returns are gone if the investor had missed out on the best 10 days. The market experience is that most of the sharp upturns in the market happen at totally unexpected times. For instance, on a single day on 18th May 2009, after the surprise elections results, the Nifty shot up 18.1 percent.
So, the simple message is: if your goal is long-term wealth creation, remain invested. Frequent exits and entrances will prove to be costly, even disastrous. The coming many years will be the golden years for investing in India since India’s GDP is expected to grow from the present $3.7 trillion to around $8 trillion by 2032. Wealth creation through the capital market, in the next 10 years, would be phenomenal and unprecedented. Therefore, from the historical perspective, it is even more important than ever to systematically invest and remain invested.