Three best friends were discussing and wondering what would happen if the market were to crash from its current levels. The market had slipped from its all-time high of 20,200, dropping approximately 700 points as of yesterday. Thankfully, it is opening with a gap-up of nearly 86 points above the crucial level of 19,500.
Out of these three friends, two were scared about their investments, especially the profits they had made from their investments. The third friend listened to their words but did not share the same concerns.
After finishing their discussion, the third friend decided to find answers to some important questions that had arisen in his mind. The first question that kept coming to his mind was, ‘Is it really the right time to book my profits and exit the market by redeeming the investments?
He then proceeded to ask himself some of the most crucial questions that one should consider before making any decision. Let’s review them one by one.
What Is The Reason For Withdrawal?
Ideally, one should establish a clear goal for their investment, whether it’s for retirement, their children’s higher education, or their marriage, among other objectives. Once the investment objective has been defined, investors should patiently wait until the goal is achieved.
To illustrate the significance of this initial question, let’s consider another example that highlights its importance. Suppose you decide to withdraw money from your Pension fund or Provident fund before your actual retirement and use those funds for purposes that are not particularly important. When you eventually retire, with no one available to take care of you, you may find yourself lacking the necessary funds for your daily needs. Think about how you would feel in that situation. Provident funds are designed for pension benefits and should not be withdrawn prematurely unless it is necessary.
Should I time the market?
We have witnessed during the COVID-19 pandemic that the Nifty index fell to as low as 7,500 levels. What if you had attempted to time the market by selling all your investments when the Nifty was at 12,000, expecting it to drop to 1,000? However, it rebounded from 7,500 to reach record-breaking levels, even exceeding 20,000. In hindsight, attempting to time the market would have led to significant regret.
In the long run, market timing is often unnecessary because markets can be highly unpredictable. For instance, from 12,000, the Nifty fell to 7,500, but then it soared to reach unprecedented levels.
Instead of trying to time the market, you can employ a simple technique known as an asset allocation strategy. In this strategy, you switch from one type of investment to another based on a predetermined plan. Some experts advocate following the price-earnings (P/E) ratio as a guide for asset allocation decisions. A higher P/E ratio may indicate an expensive stock market, possibly signalling an impending market correction. Conversely, a lower P/E ratio might present an opportunity for investors to allocate more to equities.
Here’s what you can do: when the Nifty’s P/E ratio becomes expensive, consider redeeming some of your equity investments and diversifying into other asset classes such as bonds, commodities, or holding cash. Conversely, when the Nifty’s P/E becomes more favourable, you can reallocate from debt to equities.
The most important thing for investors to remember is that when pursuing long-term financial goals, it is not necessary to time the market. Instead, focus on a well-structured asset allocation strategy and stay committed to your long-term investment objectives.
Should I opt for a better-performing fund or investment option?
Investing is not a one-time activity, rather, it’s crucial to review your investments regularly and make necessary adjustments. For instance, if you’ve invested in a fund that has underperformed for an extended period, even when the market is at its peak, you should consider finding a better option and switching from the underperforming investment to a more promising one. It doesn’t mean redeeming but switching.
Lump-sum Withdrawal or Systematic?
It is essential to consider the time remaining to reach your financial goal. If you’ve accumulated a substantial investment systematically over time, it’s not advisable to withdraw the entire amount in one go simply because you fear an imminent market crash. The preferred approach is to redeem your investment systematically, considering your financial goal and the time remaining to achieve it.
Read: SIPs vs. Lumpsums
What we can perceive from these questions and conclude about the right time to redeem the investment is that ideally, it should be when the financial goal is accomplished. Keep investing until the goal is achieved. However, this doesn’t mean one should not review their investments regularly; in fact, it is a crucial part of investing and should be done consistently.
The outcome of these reviews may indicate whether to hold, buy, or sell the funds. If an investor wishes to take advantage of changing market dynamics, they can consider using an alternative portfolio to adjust the type of funds to align with evolving market conditions.