“The decision to book profit or not, should depend upon one’s investment objectives and time horizon. For someone who has been investing through a disciplined investment approach and still intends to continue this process for a goal like children’s education and retirement planning for say five years or more, the current market level is not of much significance,’’ advises Hemant Rustagi, CEO, Wiseinvest Advisors.
“The question is what do you plan to do with the money after you book profits,’’ said Gaurav Mashruwala, certified financial planner (CFP) and investment advisor. He advises against booking profits just because the markets are up.
“Unless you plan to repay a loan, or invest in a new asset class, it does not make financial sense. Booking profits would make sense if one wishes to rebalance one’s investment portfolio, that too, in keeping with the proposed original asset allocation,’’ explains Mashruwala.
One may argue that it is natural to change the asset allocation with time, so why should one stick to the original asset allocation? Mashruwala agrees that one could change asset allocation, but only so that it meets our requirements, not because of external market conditions. “Investors are always trying to time the market which can prove to be injurious to their financial health,’’ he warns.
Sticking to one’s time horizon is a strategy that works for most investors, irrespective of the performance of the market. “For investors who may be nearing the completion of the time horizon for their goals in another year or two, it would be advisable to start the process of realigning the portfolio by gradually exiting from equity and investing in options that may not get impacted much from the vagaries of the stock market,’’ advises Rustagi.
Greed or fear should not be the driving force behind our investment decisions. “Whether we expect the markets to rise further or not, investments or redemptions should be based on financial goals and not the external environment. However, if you do decide to redeem, do ensure that you are not engulfed by frustration and a feeling of being left out in case markets rise further in the foreseeable future,’’ says Jayant Pai, head, marketing, PPFAS Asset Management.
Those investors who do not have the stomach for the vagaries of the stock market would be better off booking profits. “Returns from equities have been better than most alternative asset class returns, even from the peak of 2007. However, if the investor cannot tolerate a correction, then it is an opportune time to trim profits and move those funds into a safer asset class,’’ Sunil Sharma, chief investment officer, Sanctum Wealth Management.
Given the high valuations, many new investors are unsure of entering the markets at this stage. Mashruwala advises the new investors to first look at their goals. “If new investors have a goal of seven to nine years, then they can enter any time. If their goals are of less than 7-9 years, then they should not invest in stock markets,’’ says Mashruwala.
“Short-term investors should not be investing their funds in equities,’’ concurs Sharma. “A minimum three-year and ideally a five-year holding period is necessary for any funds to be deployed into equities,’’ he adds.
Investment is a process. Financial discipline and patience is just as important in a bull market as in the bear market. “If someone follows a goal-based investment process wherein the asset allocation is decided based on time horizon and risk profile, it can begin anytime,’’ says Rustagi.
Pai advises new investors to use diversified equity mutual funds as an entry vehicle. “However, investments should be staggered by employing the Systematic Investment Plan (SIP) route. This is because they take the guess-work out of investing and prevent you from being a slave to your emotions,’’ he says.
Deciding asset allocation in line with one’s time horizon is a great strategy as it allows investors to focus on capital safety for the short term and beating inflation for the long term. “For medium term, it has to be a combination of both,’’ says Rustagi.
“In the present scenario, one can consider a combination of short-term income fund and equity savings funds that have restricted exposure to equities for short term, balanced advantage and balanced funds for medium term and well diversified multi-cap equity funds for long-term investment,’’ advises Rustagi.
“Short-term investors should be invested in short-term bond funds. Medium-term investors may consider balanced funds with a healthy allocation to fixed income that would help smooth out any volatility. We believe that a long-term investor, one with a horizon of five years plus, should have an allocation to equities as determined by his risk tolerance,’’ says Sharma.
The original article could be seen here.
