Just recently read an article by a rookie journalist saying “At 30,000 index you should take some money off the table”.
I did not like the statement, because ‘taking money off the table’ and ‘playing only with house money’ are all words from gambling. Investing is NOT Gambling. At least as far as I am concerned, Investing is a scientific, process driven, money allocation business. Investing is serious business for me. I don’t really do “fun money” or “play money.” If I want to have fun, I use the money to go to Tadoba to see a tiger rather than send it to some Dalal Street gurus! I might be a thrill-seeker, but there is little thrill for me in investing. I only invest in such a way that it turns out that’s a good thing for long-term returns.
So now coming to why people like to book profits. Let us see when it is right and when it is wrong:
- Timing the market: If you are watching business television (bad habit anyway), and reading he pink papers you may also believe that 30,000 is some magical number and the market can only come down! ‘Cash flow driven bull run’, ‘market has run ahead of the earnings’ and THEREFORE the market has to come down. Do not believe this logic. Market could go to 33000, 45000, or 79000. None of us know where it could go. Sure it could go to 28000, 25000 or whatever is also true. All of us can only say that none of us know. So if you think you will sell in 2017 May so that you can buy again later on, you are making a mistake. Yes I have occasionally been able to buy some shares at the bottom of the market and sell at the top. However, those have been strokes of luck. So if you are selling for timing the market, bad idea. The difficulty with market timing is that you have to be right not once, but ALWAYS, and you have to be right by enough to overcome the transaction costs including taxes and the time and effort. It is hard to do this consistently over the long run that it isn’t worth trying. As a general rule, all that “going to cash” is going to do is decrease your returns.
- The Wealth Effect: When a person’s wealth goes up, there is a tendency to take some profits and go out and splurge. This is not a bad idea at all, but should be done sensibly. Many lottery winners do not understand this, and go out and spend all the money. No lottery winner has been able to escape this effect. So if you made Rs. 50 lakhs profit in the market in a year, take Rs. 5L and go for a trip to Europe. However if you make Rs. 30L and you spend Rs. 20L on a grand tour, it may not make too much sense, be careful. However, it is important to remember that you may not really be as rich as you think you are in a bull market (but neither are you as poor as you think you are in a bear market!) “Mr. Market” has volatile moods which even out over the long term for the patient investor.
- Re working the Asset Allocation: A few people book profits to make a permanent change in their asset allocation. To taka phrase from Bernstein “When you win the game, stop playing.” What he means by this is that if a recent bull market has reduced your need to take risk, then take less risk. What I mean is if you can sell some shares and invest in debt funds or bank deposits AND STILL meet your goals go ahead and do it. Most investors will want to decrease the volatility of their portfolio as they approach their goals like retirement. If you think it is time to reduce sequence of returns risk, do it. It is of course wiser to make that sort of an asset allocation change a few years into a bull market. Is that also market timing? No. It is a reaction to YOUR NEEDS, and you will not care what happens to the market further. You are not keeping cash to invest again.Have you been guilty of “taking money off the table?” Why did you do it? Did it work out well for you? Comment below!
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