Expert advice

Jul 21, 2011,09.39 IST

Do you need to regularly book profits, as many believe?

By Suresh Sadagopan, Principal Financial Planner, Ladder7 Financial Advisories

Rammohan was tormented by this very question… he wanted to book profits when the markets go up and wanted to invest in the markets again when they come down… only that his friend and financial planner, Aditya, would not allow him this indulgence.  Aditya, was of the firm opinion that such short-termism does not serve any purpose and indeed is deleterious for an investor. The reasons Aditya gave seemed convincing enough… but still, Ram was feeling the itch to cash in when the going was good.

Aditya advanced the following arguments –

1.       Investments have to be done with a purpose.  If it has been done as part of a broad strategy, why should one disturb the investment, every once in a while, to take “advantage” of short term ups and downs.  Taking advantage of ups and downs is easier said than done.  One may get carried away when the market is going up, like most people did during the go-go days of 2007. They invested in a rising market as there were many pundits who were predicting a very rosy scenario for the future, then.  And then, there were others who predicted absolute dog-days for years on end, once the market bottom fell off. Both were not true as we now know. If one had invested in the rising markets and had cashed out after the markets have fallen precipitously, they would have made massive losses. Lots of them have. Timing the markets is difficult. It happens to some, mostly by chance. Stay invested and over time good returns do accrue.

2.       If one cashes out and again reinvests in the same asset class, it beats the purpose of cashing out itself. If for instance, one cashes out from a Large cap scheme, books a profit only to invest in another large-cap scheme, it serves no purpose. If one redeems from an Equity MF scheme and invest in a debt scheme, due to specific requirements or due to asset rebalancing, only then it would be fine.

3.       There are costs & work involved in regularly cashing out/ reinvesting. One needs to consider these and see if it is worthwhile going through all that trouble.  Many try to change the loan agency when they find a slightly cheaper loan, which entails a cost and paperwork… or sell equity and pay brokerage for selling and reinvesting.  There is not much gained in many of these transactions at the end of it all. Being opportunistic is a favourite word with investors.  But it is not as simple as it appears, on the surface.  Size up the opportunity and analyse all aspects to check whether it is worth the time and effort and then move in.

4.       If goals are mostly long-term, like retirement, children’s education, marriage, why does one want to take short-term calls? People indulge their gambling instinct with their shares and Mutual funds, which is unfortunate.  After doing that, they blame the stock market being a gambler’s den.  Stock market has given 18% CAGR over a long period of over 30 years. No other asset class has given such spectacular returns, over such a long period, Gold and property included.

5.       They are not gamblers when it comes to property purchase or gold.  They are willing to stay invested for several years, even decades. Obviously they get good returns in these and they stay convinced that these things pay off very well. As regards stocks/ Equity MFs, many have burned their fingers because their time horizon has been several days to several months ! If one gambles, one gets a gambler’s returns. Invest for the long-term and you get good returns on investment.

6.       Just because Stocks and Mutual Fund NAVs are quoted on a daily basis, one need not have to look at them and plunge into the  depths of panic or get carried away in a wave of euphoria.  If one has chosen wisely, it is a good idea to leave it alone. Looking at one’s portfolio once every quarter or half-year is fine, to see if they are still good to retain.  If they are good, it is better to simply leave it alone.

7.       Diversified portfolios are good.  Not for nothing we have a saying which exhorts one not to put all eggs in one basket.  A good diversified portfolio is the best protection for long-term performance.  Even within the asset class, proper diversification is necessary. Getting carried away by fads is dangerous. Currently, investing in Gold is the fad.  People see what returns they get now – they don’t look how it may perform in the long-term. That’s a mistake.

8.       Look at cumulative / growth options, if investments are for the long-term. There is no point in receiving small dividends which one has to keep track of. Since dividends mostly come as direct credit to the bank, it gets spent without one even realizing it. By this, the beneficial effect of compounding does not take place.

After listening to a fairly long sermon, Ram was pondering over it. Aditya’s throat was parched. He sipped on his lemonade and left Ram to ruminate… there was enough food for thought for him, for an evening.


 

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