By Dinesh Rohira
In late 2014 when I asked an investor friend about how much money he had made on the investments done, the answer was 35%. With this trend of his financial journey, he was set to hit a million mark in a few years. A week ago, when I thought that he must be only a little short of hitting the jackpot of a million, I asked the same question to him. To my surprise, the answer was still the same – 35%! Where did he go wrong?
Many people perceive that you can make money only by investing in right instruments at the right time. This understanding tends to overlook the silent and one of the most important factors, that is the real money is made only when you book the profits. There is a general say that “One can’t time the market”, which is true. However, markets and returns are all about timing. How much ever one would like to avoid timing the market, best of the returns are achieved when one manages one’s investment on a real time basis and has an element of timing the entry and exit of an investment. The static investment gives sizable returns only if you are lucky. Most investment advices are geared toward buying, but selling advice is of an equal importance as that of buying. After all, the money is made only when you sell.
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Exiting from the investment is a difficult decision as there are many questions to be answered like where to reinvest, will its value go up further, is this a correct time, and the list could be longer. One needs to distinguish between an Advisory and a Recommendation. Many players in the market may label themselves as Advisor.
However, they are largely recommending which essentially may not be aligned to your goals, but based on the market. In addition, post recommending, in the majority of the cases the advice on the investment is never carried out on an on-going basis, which is a very important need to ensure one makes money. As markets are volatile, one needs frequent advice on one’s investments, whether to stay invested or book profits. In the absence of this advice, the investment is as good as a dart in the dark.
Most of us fall into the trap of some myths of investing and do not exit at the right time.
Myth # 1: The longer I stay invested, the more money I make.
There is a life-cycle for every investment instrument, and you shouldn’t be overlooking this aspect while making any investment decisions. We have the markets at the same level now as it was in 2015. Hence, it is a smart move to book the profit and exit at the right time.
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Myth # 2: I will buy some good stocks or funds and forget it.
If you forget about the stocks, there are chances that the stocks will forget you too. Always review your portfolio at regular intervals. Three months is a good time to understand the movement and gauge the potential of your investment.
Myth # 3: What has performed well in the past can never go down.
Don’t judge the future of any investment based on its past performance. The smart move would be to book the profit once the investment reaches its saturation.
Myth # 4: Blue chips are always safe. They are the lifetime purchase.
Not always. This statement does not stand true as some investments loose the heat and can turn out to be a gradual wealth destroyer.
The decision of exiting from the investment may not be as difficult if we understand the rationale of considering the exit strategy.
Achievement of goals: Your investment should be directed to the achievements of your financial goals. Since it is a proven fact that no asset is expected to perform at the same pace for the lifetime, so it would be an intelligent move to book the profit and exit at to utilize the said investments to realize your goals.
Review of portfolio: Do review your portfolio at regular intervals. Reviewing your portfolio doesn’t only mean selling or buying the investments, but also seeing the performance of the existing investments and rebalance the portfolio for optimizing the scope of your investments.
Performance par expectations: Even you have your expectations set while you pick any investment. Don’t get greedy, and book your profits in due time and exit from the investment on achieving the targeted returns. A time and return-based exit could get you the desired results. Stay invested for that specific time and exit to optimize the potential of your portfolio.
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It is never a wise decision to attach an emotion to investments. One needs to understand and prioritize the intentions towards investments and financial goals and plan the exit accordingly before it turns out to be an opportunity lost. Exit advisory is as much important as the buying decision for investors and we see a paradigm shift where the acceptance and implementation of exit advisory is catching up to build a robust portfolio.
(The author is Founder & CEO, 5nance.com)