We often discuss which stocks to buy and when we must include them in our portfolios. Rare often do we share how long we must hold on to our investments or if there is an investment exit strategy that we must be aware of. This is important as exiting too late or too early can cause you to suffer losses (real and notional). Knowledge about the exit strategy is also important since you are blocking your hard-earned money into investments for a prolonged period. You cannot obviously redeem your investments in a hurry or at short notice in case of an emergency. While there is no tool that can predict the next market crash, we cannot rid ourselves of the herd-driven mentality in the market that causes it to crash following some unexpected news.
While you cannot time your investments, knowing when to exit may save you from unwanted heartaches in the future. The current market volatility is an example of how sudden fluctuations can cause your entire investment to be wiped off within a few days. This also explains the futility of investing in a lump sum and the benefit of investing regularly through systematic instalment plans (SIPs), especially, in equity-oriented schemes that include a basket of equities from different sectors. This helps as your portfolio would continue to earn some returns from one sector despite other sectors succumbing to the effect of the falling market.
Exiting early or late?
To start, start investing in different funds depending on your financial goals. This will help you exit funds that may have failed to perform during the past many years. You can then focus on funds that yield you the desired returns.
Exiting a fund does not always have to be because of its failure to perform. You may also redeem your investments when it has reached their target value. You must decide the target value based on your financial goals and the expected returns from your investments.
Before you move ahead to decide when to target your investments, you must check your asset allocation. Whether you must redeem your investments after a specific number of years or exit them halfway, depends on what your assets are and how you have divided them into equity and debt depending on your risk profile. Also, depending on the market movement, you may not exit but simply shuffle your investments between equities, debt and gold. For example, during a bull run, the focus is on adding more equities to your portfolio while the anticipation of a bear phase can make you lean more on debt investments.
However, when it comes to complete redemption, especially, of equity-oriented funds, you must do it when the market is on a high. How many times have we seen the market rush towards greater heights irrespective of company valuations? Logic takes a back seat and euphoria takes over the market with every trader and investor riding on the returns and profits that the market gives. However, this bull run is not permanent. The bubble can burst leaving you and the entire investor fraternity at the mercy of the bears. When the market is at its highest leaving some of the best financial planners bewildered and bereft of any logical explanation, it is time to exit your investments. Though you may witness the market going a bit higher the following week, remember that it is easier to bear notional losses than real losses. Just collect the profits and re-invest them into some debt funds or fixed-income instruments. This way, you will not only earn good returns from the market but also save your profits from being wiped off by sudden and unwarranted market crashes.
However, if you have invested from a retirement perspective, make sure that you focus on long-term investments. While timing the market may not be possible, it is the time spent in the market that will ring in cumulative benefits.
Be mindful of the tax angle
Once you have decided to exit your investments, remember that you have got to pay taxes on your investments. Know how your returns will attract tax liability. This will lend you more clarity on the net returns you would earn a post-tax payment.