Navigating the markets: When to sell, when to stay?
The second wave of the pandemic is only just peaking. Considering what the country has been through over the past year, it is interesting to note that the market’s behavior doesn’t seem to reflect this at all.
After sharp losses in March 2020, the market rebounded - and how!
Both the benchmark indices have clocked in record highs. In fact, Nifty 50 has jumped 111% from the lows in March 2020, and the BSE Sensex has gained 107% across the same period. All in all, this should be great news for market investors, isn’t it? While that is largely true, these market highs bring in a unique dilemma for equity investors.
Should you hold, or should you sell?
If your portfolio includes investments in equity, it’s likely you’re wondering about this too. The answer to this dilemma, however, is not straightforward.
Sometimes, holding on to your investments may be the right way forward, even when the market is on an uptrend. At other times, selling out makes more sense.
Want more clarity on these scenarios? Let’s take a look at when you should sell, and when you should stay.
Reasons to sell your equity
The basic stock market mantra goes - ‘Buy low, sell high.’ So, if the markets are moving upward, you may be tempted to sell out and book profits. It’s no wonder then, that bullish markets are often the primary reason investors sell their investments and exit their positions.
But there are also other times when it makes sense to sell your investments - even in a bullish market - and reinvest the funds elsewhere. Here are some such reasons.
When the stock is about to lose value
If the general market perception appears to be one of caution, you may want to consider selling your stocks. If traders think the market may quickly take a downturn and that stocks may start losing value, they’re going to start booking profits. Watch out for these signs and take what profits you’ve made, if you anticipate a loss in value.
When the financial ratios start to look less favorable
Financial ratios are key indicators of how the stocks you hold may be performing. Seasoned investors and traders rely on these ratios to understand price and valuations. You too can make use of ratios like the dividend yield, the price to earnings (PE) ratio and the earnings per share to get a better idea of how favorable the stock’s financial backing is.
When you’ve hit your target prices
If you’re a trader, you’ll likely have target prices set for your trades. But in a bullish market that’s performing exceptionally well, it may be tempting to overlook those targets and time the market to book higher profits instead. However, it’s always a smart idea to stick to your trading plan and sell when you’ve hit those target prices.
When the stock’s dividend payout declines
If your primary reason for holding on to a stock is the dividend it pays, then reduced dividends can influence your decision to sell or stay. Sometimes, even in an upward market, the company you’ve invested in may be facing trouble. And that could lead to cutbacks on the dividend payouts. This may be a red flag, so make sure you investigate further and act appropriately.
When the trading volume goes south
A high trading volume is linked to good liquidity. So, if the trading volume of the stock you hold is on a downtrend, that could lead to issues with stock liquidity. And the more illiquid a stock becomes, the harder it gets to off your investments. So, decreasing trading volumes are another reason you may choose to book profits.
Reasons to stay invested
If the market’s moving upward, you’re going to want a good reason to remain invested, right? After all, it’s easier to exit your position and take home a nice profit instead. But sometimes, holding on to your investments may be the smarter course of action. Check out the reasons to hold on to your investments.
When you’re investing over the long term
Short-term investors may react to market highs and lows. But as a long-term investor, your sights will likely be set on the future. Long-term investments go through multiple market cycles, and there may be other bullish markets you’ll benefit from. Holding your investments may be the more sensible thing to do, because this uptrend will certainly not be the only one your stocks may experience.
When you’ve invested in high-dividend stocks
If you’ve invested in high-dividend stocks and you’re continuing to receive handsome dividends, there’s no immediate reason to sell off your holdings. As long as the dividend stocks continue to yield periodic income without any reductions, there’s no immediate sign of trouble.
When you follow a Systematic Investment Plan (SIP)
A Systematic Investment Plan (SIP) is inherently designed to tide over market highs and lows. The basic thing about SIPs is that they help you invest consistently. So, one bullish market is no reason to stop your SIPs midway and book profits. It’s more prudent to remain invested over the long term.
When the stocks in your portfolio hasn’t peaked yet
The market as a whole may be on an uptrend. But that’s no guarantee that all the stocks in your portfolio have to follow suit. After all, each stock will have its own trend. Even if you follow the ‘Buy low, sell high’ mantra, your stocks may not have reached their high yet. So, take this into consideration to decide whether you should sell or stay with each stock in your portfolio.
When you expect the bullish trend to continue
American investor and philanthropist Peter Lynch famously observed, “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”
Market correction, as it turns out, can be one of the primary drivers of panic selling. However, if you expect that the market’s upward trend will continue for a few weeks or months, that could be a reason to hold your stocks.
So, this should give you some clarity on when selling may be the right course of action, and when staying may be. Keep in mind that the stay-or-sell decision is unique to each stock in your portfolio. You’ll have to analyse the scenario for each stock, and decide whether to keep it or book profits.
Read next: SHOULD YOU INVEST IN STOCKS?
First-time investor? Or perhaps, you want to invest more money in the markets? Or maybe even book profits? Whatever the case, there are specific strategies for investing in stocks. Our blog on this subject outlines these details further.
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