There is no ideal time to enter and exit the stock market. So, instead of being swayed by market volatility, focus on what you can control and keep a long-term holding horizon
The question in most investors’ mind is whether they should sell a significant part of their equity holdings now as probably the market may fall or hold on to their shares.
The life of an average investor during the last six months was a turbulent one. The 30-share BSE Sensex fell by 20% during March. From April till August, it had made a significant recovery, climbing up by 31%. Within a short span of six months, Indian investors witnessed both sudden fall and smart recovery of the index.
Given this background, many are wondering what will happen next. The question in most investors’ mind is whether they should sell a significant part of their equity holdings now as probably the market may fall or hold on to their shares.
What caused this volatility? The Covid-19 pandemic which started at the beginning of the year is one of the major reasons for such market volatility. Though the virus was reported sometime in December 2019 in China, the impact was felt across the world especially within developed economies. Markets across the globe collapsed during March. The BSE Sensex touched a low of 25,981 on March 23 and on the same day S&P 500 of the US reached the bottom at 2,237.
The governments of various nations announced various preventive and relief measures, series of lockdowns, etc. Countries across the globe reported sharp reduction in their GDP coupled with the impact of pandemic leading to salary cuts, job losses and shutting down of businesses. India reported GDP contraction of 23.9% on a year-on-year basis during the first quarter of financial year 2020-21.
Focus on only what matters The entire world is anxious to know when this crisis will get over, but nobody has any concrete answers. Generally, during such pandemics, various assumptions and theories float around but no one knows when normal times will be back. In a way, uncertainty is an investor’s friend. Those who have invested during March are reaping the benefits and those who simply stayed put and waited patiently have also recouped their losses. Thus, it does not matter how hard you try—you cannot wish away the crisis. But make sure that you follow your investment plan and if required, make suitable changes according to your income levels, risk taking capacity, etc.
Is it a good time to exit the market? Investment science literature and a large number of empirical studies states that market movement should not be the reason to buy or sell shares. As an investor you should sell shares only on two occasions. One, if you need the money urgently and two when investment goals are achieved. If that is not the case, it is advisable to follow your original investment plan. As an investor you should care about your initial investment and value while exiting.
Assuming that your investment goals are nearing, do not wind up your portfolio. Instead make a systematic withdrawal plan (SWP). If there is no immediate requirement of funds, transfer your corpus to safer instruments such as liquid or short duration debt funds, again through systematic transfer plan.
To conclude, there is no ideal time to enter and exit the stock market and focus on what you can control and keep a long-term holding period.
BUY, SELL OR HOLD? Market movement should not be the reason to buy or sell shares. Only your initial investment and value while exiting matters. Sell only if you need the money urgently or if your investment goals are achieved. Stick to your investment plan. If required make changes according to your income levels, risk-taking capacity, etc. If your investment goals are nearing, do not wind up your portfolio. Instead make a systematic withdrawal plan. If you don’t need the funds immediately, transfer corpus to safer instruments via STP.
The writer is a professor of finance & accounting, IIM Tiruchirappalli