In March, everyone panicked and missed the rarest opportunity to Invest at discount prices in Shares. Index from its lowest position managed to rally up by 50%. An 10 lakh investment is worth 15 lakh today. 5 lakh profit is handsome in 6 months. At 6% it takes 8 years to gain 50% in Fixed Deposit from bank.
But here we are not going to mourn the missed opportunity. We are going to talk about those people who spotted the opportunity, volunteered for the risk and now, are sitting at comfortable profits. Smiles 🙂
Slump to Record High.
Let’s zoom out and take a look at this nifty with a bigger frame. The market literally collapsed into the deep valley during March month, but steadily and slowly it recovered. If any market expert made a daring prediction of 13000+ in nifty within 6 months, that would have hurt his or her profession and reputation. Now even you know that, In spite of lockdown and overcoming multiple hurdles Nifty managed to recovers and shoots up to an ALL-TIME HIGH level. 10 lakh invested 1 year back in nifty ETF(Exchange traded fund) is worth 11.4 lakh after 1 year.
Since nifty is at all time high, Everyone demands to know ‘Is it best to book profits and exit now?’
You could exit now and one of these two scenarios can playout.
1) You are correct and market fell
2) You were wrong and market kept going up after your exit.
Historically there were five times you were correct in exiting market at peak.
a) year 2000 exit at peak 1800 . market fell by 55% , 900 in next 20 months.
b) Year 2008 . just before Global financial crisis started. Market fell 65% from 6000 till 2500. Good exit.
c) In 2011 from high of 6304 till 4547 , 12 months fall.
d) 4th time, from 9153 till 6750 in year 2015. An 25 % crash in 12 months.
e) The 5th time was ofcourse this year march 2020. a 30 % in ONE MONTH !! It was the speed that shocked all.
However even though you are correct, did you notice how nifty made a new high every 3 year post those crash from peaks? Thus even if you are correct to exit “large cap” stocks now, you must re-enter within 12 months. Out of 20 years, just 5 times you were lucky with such exit at peak.
Now when you exit here, you need to be damn sure that, nifty will crash back by 20% at least within 12 months now. Just to put yourself on the back for an wonderful timing !
what if you are exiting at peak but, there is still rally remaining?
A rally that started in July 2004, didn’t stop until January 2008 !!
What happened to those who exited in March 2005, after a 50% rally from the bottom? they missed the next 200% rally till January 2008.
Same thing many of us did this year, by exiting at 11000 levels of nifty. Just to witness it cross 13500 without any correction.
Now, this brings doubts into one’s mind. Should I dare to hold or take my profits and exit? Probably you are exiting because the profit seems too large to be true ( at least in percentage terms). I spoke to someone who said, He doesn’t feel deserving of such profits so quickly that, he rather cash it in. That is a fair point.
Even before the march crash occurred, we knew in 2019 January ( 14 months before) that nifty will eventually be above 11000 by the year 2022. Which meant even 8000 was a golden opportunity to buy for us.
Okay, so you got it. You will not exit. But maybe you could explore the option of stop investing more money now. I will park my “new investment money” in debt. – That makes sense. Don’t disturb your existing holdings in large-cap stocks. Let them be. Just reduce your SIP if you are uncomfortable.
Let us make this one detail clear. When we say the market is at an all-time high, that means large-cap companies, especially Nifty is at an all-time high. The market is not small or mid-cap stocks.
So, your midcap or small cap is NOT representing the market. It could happen such that, While the market falls, your midcap might keep going up or vise versa.
Mid-cap and Small-caps are their own world altogether. Fundamentals, Sudden news that leads to demand spikes or bad news or even rumors’ can push your stock price down.
Did you know BSE has a mid-cap and small-cap index? And they are yet to cross all-time high !!
So, a small-cap or midcap portfolio guy is yet to even cross all-time high w.r.t his/her 2018 values. Should you exit now?
The first dilemma is, you are trying to pick the top.
Your exit action means,
A) you are okay to sacrifice any potential future profits. You are satisfied with the present profits and would like to go home with what you have now.
B) You are predicting the tip of the market. If you are so sure, why not but put options for large caps, or go short in futures or run covered call strategy, etc. We know we do that a lot.
C) You are confident enough to make a re-entry into markets within 12 months when it crashes.
The consequence is You lose the right to feel bad or complain if the rally continues and nifty touches 18000 or more. Yes, that is a high probability in the next 2-3 years.
Exit in phase week by week. It could be 10 percentage every week such that, in the next 10 weeks ( 2.5 months) you are out with some cool-off period to gauge the trend of the market.
Stop new investments and park them in debt funds for now. Do not touch existing investments. If the market falls, you are happy to invest that halted SIP from debt into equities afresh. If the market resumes rally, at-least existing stocks are gaining from the opportunity.
Migrate to stocks that do not participate in market rally or crash.
Finally, always look at the profit created in the market in comparison with your personal income. If you earn say 12 lakh per year from your main job or business etc. Now even though your returns from the market may be more than 50%, check if the absolute profit in rupee terms is 3 lakh plus or not. This 3 lakh is just 3 months income for you when compared against the personal income. And honestly, i don’t think a 3 months extra income is going to move your financial needle at all.
When the market rallies by 50%, one ought to gain at least 2 years worth of extra income so as to make the risk taken worthwhile. For that to manifest into reality, the starting invested capital needs to be substantially large. Since we all cannot be investing such large sums into markets, people choose the SIP route where over a long time frame, the accumulated investment + profit becomes a huge capital. What happens when you interrupt that wealth creation is, either you boost the returns by timing the exit ( only 5 times in the last 20 years) or regret life long for exiting that awesome company just at 50% profit.
Someone, an IDIOT guy. He gets up on January 1st of every year. Checks out top 3 companies in India by market cap. Without even understand the name of TCS or ITC, he simply invests 1 lakh each into 3 companies.
A 3 lakh one-time investment, every January 1st into 3 top stocks. Never touch them again. In 12 years he invested 36 lakh. and this strategy, believe it or not, beats nifty by 3 % IRR. Nifty gave 9% IRR vs 12% IRR. It was an embarrassment when an “I Do Investment Only Once” ~ IDIOT strategy beat the skilled professionals by a mile. Read about it here