Sensex Hits Historic 85,000: To sell or not to sell? The dilemma explained | Stock Market News

There are two sides to investing, buying and selling. The most basic purpose of any investment is to make profits. Those profits are useful to you, only if you actually book them when you sell your investment.

However, the danger with focusing too much on profit booking is that you don’t want to indulge so often that you lose out on gains compounding if the investment was just left to grow. The market benchmark, S&P BSE Sensex is at 85000 now, the last 2000 odd points were gained in a span of 6-7 market days.

So far in 2024, the index has already gained nearly 18% in 9 months. This is on the back of the previous eight years of positive returns. It’s rare for markets to have such a long streak of positive returns.

Thus, comes the question, is this the market peak, should you sell?

The many reasons to sell

Before we answer that question, it’s worth going through the practical reasons why you will need to sell, which are not to do with the market movement.

Reaching your goal: If you are close to reaching your goal timeline, then you must sell and reinvest in a low-risk product to preserve value till you need to spend the money on fulfilling your goal. This assumes that you have a goal-based investment strategy. These sound tedious and boring, but in reality, they are a very useful way to shut out the noise and focus on what you need your money to do.

Good quality equity portfolios can deliver volatile returns in the short term, at the same time, they can deliver inflation beating, compounded returns in the long term. Thus, for goals which are at least a few years away, investing with the help of an equity portfolio makes sense.

When you are 12-18 months away from realising your financial goal, it does make sense to sell your equity portfolio earmarked for the goal or to the extent that the money is needed and reinvest it in a low-risk product with focus on capital safety. This way you will avoid any impact on the value of your investment thanks to short term volatility in equity markets.

Rebalancing: When one asset class delivers outsized returns in a short period of time or consistently over time, the allocation, thanks to accumulated profits, towards that asset tends to go out of balance.

If equity markets are relentlessly going up, then it’s possible that thanks to the gains your allocation to equity has gone beyond your comfort zone. In this case, booking profit to the extent of readjusting the overall asset allocation to your previously earmarked level would be the rational action to take. This means partial selling of equity to rebalance your asset allocation.

Change in portfolio quality: If there are any fundamental changes in the quality of your portfolio, you should sell what’s not working. A fundamental change means when the company you have invested in is consistently delivering lower earnings growth and the stock price is correcting.

Or if there has been a merger or an acquisition or a management change which has a negative impact on earnings growth, that is a fundamental change and is likely to have a negative impact on the stock price. Here too, selling is appropriate.

When it comes to a mutual fund portfolio, a change in the fund manager or a change in the investment philosophy with which the portfolio is constructed are reasons to reconsider holding on. Consistent poor performance in the peer group also needs to be investigated to see if you should sell.

In all these cases, the market level is nowhere in discussion.

Market peaks are usually identified only after a correction happens. Moreover, once you sell out, you will need to reinvest. How long are you willing to wait to reinvest and take on the opportunity loss? If you get the timing right, you will be able to sell at a peak and reinvest just as the price trend starts to move up from the market bottom. However, that’s a rare situation.

In March 2020, when people sold thinking it was a peak, they were satisfied with their decision when the market crashed towards the end of the month. However, in a matter of weeks it was back up and many missed that opportunity to re-enter. This inability to time the markets is not unique and leads to an opportunity loss for many.

Reinvestment risk?

Unless you need the funds when you sell, you will lose out on returns if the money is not reinvested. If the market trend does not change, you run the risk of missing out on equity returns. If it’s a stock you are selling, you should identify another stock to reinvest in before you sell.

Selling and just sitting on the money has a huge cost in terms of loss in notional returns.

Selling and sitting on cash is good if the market actually crashes. In this current market uptrend, market commentators have been waiting for the domestic equity markets to correct ever since the Sensex hit 65000. So, really, it’s anyone’s guess when that will happen.

Back in 2000-2001 when the equity markets crashed, it came on the back of outsized returns for 2-3 years before that. History teaches us that you should be prepared for anything in markets. Keep some money aside in low return, low risk investments, which in the event of a crash can be switched to equity.

Whatever happens, be mindful of your goals, your desired asset allocation and your portfolio quality. These are the three things which will determine the success of your portfolio returns in the long run, not the market peak.

Lisa Pallavi Barbora is a financial coach and founder of moneypuzzle.in