Sensex at all-time highs: Should you exit your investments and re-enter at lower levels?

The markets are high and they look overvalued. Many are worried over the expensive markets. But the bigger questions that investors must ask, are the following.

1) 'When' will it fall?

2) What if it does not fall much; i.e., what if it is a time-bound correction and not price-bound one?

3) If it falls, then by how much?

We all know it is tough to develop good habits. And tougher to leave bad ones (such as smoking).

Now, let’s apply this logic to the stock market. A lot of investors are in a dilemma: ‘should we book profits for now and enter again when the market falls?’ Let’s say you execute this thought and sell all your investments today with the plan of entering the market again when it falls. And let’s assume your decision is proved right and the market falls drastically in the next few days or weeks.

If that happens, it is not good news. This is because if you are proven right in this decision, you will do it again in the future. That is, you will ‘time the market’ again and again. And this is a bad habit. If you time the market 10 times in the next few years and you are wrong just 3-4 times out of 10, you may still lose money overall, forget about making great returns.

Check the records of successful investors. Do they follow this practice? If not, why? If they cannot or do not predict the market, what are the chances of you being right? We have to be careful about the kind of actions we take, as they will become a habit. If this habit is a bad one, it will be very tough to leave it.

Now, let's see if we can answer the three questions asked earlier.

'When' will markets fall?

I know investors who sold their portfolio in the month of July 2020. The market had recovered significantly from its March lows and economic activity had hardly started.

Logically speaking, it was a right call. Many investors and experts were expecting the market to fall again. We are in December 2020 now and we all know what has happened from July onwards. It is not about being ‘logically right,’ but about developing the right habit.

I also know a few of these investors who entered the market again in September-October 2020. It was not easy for them to watch the markets grow continuously when they had sold their investments in anticipation of a fall.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves” - Peter Lynch

Similarly, if you sell today (December 2020) and the market keeps rising for another few weeks or months, it will become extremely difficult for you to take any decision. Each day will present a dilemma.

Also read: These 3 psychological factors will determine your success in stock markets

What if there is only a time-bound correction?

Correction can be price-bound, the way we had in 2008 and March 2020. And it can be time-bound as well. That is, the markets remain in a certain range for a very long time.

Examples:

1) From December 1993 till February 1999 (for more than five years), the Sensex was range bound between 3000 and 4000 levels.

2) From July 2009 till December 2011, again, the Sensex was range bound.

After moving in a range, the market started moving up again in both the cases. If that happens again in the next few months or years, your plan to enter at low values may never fructify.

Also read: 4 mistakes to avoid in the current equity market

If it falls, then by how much?

Did you invest a huge amount in March 2020? No?

Maybe because you were waiting for the markets to fall more. We, as humans, have this deep desire to buy at the lowest level. And who tells you where the bottom is? TV experts, your advisor, neighbours, colleagues or friends?

Investing at the lowest point and exiting at the top is a matter of luck, not research. Therefore, the best strategy is to invest at every level. Even at today’s level in December 2020.

In a nutshell, make sure you are conscious about the habits you develop while investing in the stock market. As this is what differentiates a successful and a not-so-successful investor.