As we write this, the Sensex is down around 9% (27,105 points) from its peak of 29,681 points that was reached on 29th January, 2015. The volatility has been rather pronounced this last one week – there was a fall of 723 points in one day (6th May, 2015). Investors naturally have started panicking.
There are various reasons being ascribed to this ‘correction’ – ranging from the tax authorities wanting to impose MAT on Foreign Portfolio Investors to a tax on subsidies being imposed in the Finance Bill that was passed in the parliament to a rally in crude oil prices and even an IPO boom in China!! As we said, the reasons are varied and manifold. However, the effect is that the market is falling. And the question is that if this is indeed so, should investors get out of (sell) their equity holdings (shares and mutual funds) in an effort to cash in on any profitable investments and stop loss in others?
The simple answer is no – in fact one should try and desist from succumbing to this classic investor behaviour. Whenever there is a steep movement in the market indices, either upwards or downwards, generally investors react by selling off their investments. Essentially, this is a volatility related response or risk averseness.
Bernstein William in the book “The Intelligent Asset Allocator” summarizes this investor psyche aptly. He says, “There are two kinds of investors — those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type – the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”
History has repeatedly proven, time and time again, that it is impossible to time the market. As we mentioned earlier on, the index is around 27,105 points as we write this. But no human being is capable of knowing for sure what would the market be at tomorrow, or the next week or the next month or even later.
So, if you invest or disinvest based on market movements or expected market movements, it amounts to pure speculation. And know this much — you can either speculate or accumulate, but never both.
Which brings us back where we started. When do you sell your investments?
Yes, investing is all about long-term, however, it has to be the right investment in the first place. Study the performance of your fund against their peer group and also the benchmark returns. Say your fund has gained by 10%. While you may be happy, this doesn’t actually tell you much. To put the fund’s performance in perspective, you have to compare and contrast it against its peer group as also to the benchmark returns. Be careful in selecting the correct peer group. One should not compare an equity diversified fund against a sectoral fund or a large cap fund against a mid cap aggressive fund. Also, take care that you gauge performance over a reasonable period of time. Most information sources publish three month figures of fund performance. Three months is too short a time to come to any conclusion.
Moving on, another reason that you sell your investment is if it doesn’t remain the same investment.
For instance, balanced funds earlier qualified with a 50% exposure to equity. Now, as per the new tax laws, at least 65% ought to be invested to equity. Most fund managers, in an effort to spike the return, even take a higher exposure. Therefore, if the investment has become riskier than what you would be comfortable with, its time to sell.
Mutual fund companies will argue themselves hoarse that fund management is a process driven activity and the individual doesn’t matter. However, successful stock selection is a matter of experience, perspective and instinct. These are human qualities that cannot be completely reduced to a process. The fund manager’s exit is a red flag, however, it could also be possible that the new guy is better than the earlier one. So keep the fund under your radar. A discernible blip in the performance may mean its time for you to desert the ship too along with its erstwhile captain.
Every investor has his or her own risk tolerance. Say you are comfortable with 50% of your funds invested in equity. Time to time, you need to check the asset allocation. With a substantial run up in equities, chances are that your total portfolio has become distorted towards equity. To bring it back, you would need to sell. On the other hand, if the market falls precipitously, you would actually need to buy to realign the allocation. Thus automatically you would be buying low and selling high.
We have established so far that amongst all the reasons for selling your funds, falling or rising markets should in no way influence your decision. If anything, if markets start falling, please buy additional units — the cheaper deal will hold you in good stead eventually.
However, what if you need the money? This then forms the foremost reason to sell any investment.
Apart from must spends like for medical emergencies or say escalating education costs, do once in a while indulge yourself. Take that foreign trip that you so wanted. Buy your kid the iPad that he so badly desires….. You live only once and what is the point of all this if you can’t pamper yourself or your loved ones once in a while? Like they say, if you have to do something wrong, at least do it right!
(The authors may be contacted at wonderlandconsultants@yahoo.com)
