Should You Sell Your Stocks Now?

Apr 8, 2022

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Everyone remembers the Mike Tyson vs Evander Holyfield bout of June 1997 as the one where Tyson bit off his opponent's ear.

However, it should also be remembered for a Tyson quote that is permanently etched in history now.

When Mike Tyson was asked whether he was worried about Holyfield and his fight plan. He is believed to have answered, 'Everyone has a plan until they get punched in the mouth.'

Over the years, there have been many variations of this quote used across different fields.

My own investing version would go something like this, 'Everyone has a process of investing until their stocks hit a couple of stop losses.'

The way some of the smartest investors have reacted to events recently is ample proof of the validity of this statement.

Until recently, the social media and other platforms were abuzz with the idea that stocks would go on to make new highs in 2022.

The very same investors whose confidence knew no bounds, seem to be a confused lot these days. They are latching on to every advice they can on the way forward.

Should they continue holding on to their multibaggers or make an exit? Should they raise some cash and if yes, how much? Or should they go bargain hunting, especially in stocks are down 30%-40%?

Unfortunately, there is no one-size-fits-all answer to these questions.

The way you should approach buying and selling stocks, depends a great deal on your investment horizon, your goals, and the time and effort you are willing to bring to the table.

If you want to spend next to no time on investing and have a time horizon of minimum 10 years and more, then an SIP is the best way.

The best advantage of an SIP is that you there is absolutely no need for you to time the market. You can start anytime. The way the stock market and the power of compounding works, you can end up with very good results over 10-12 years.

On the other hand, if you try to be a little cheeky such that you stop your SIPs when the markets hit a new high and then re-start them somewhere near the bottom, I don't think you would have any big advantage over the person who diligently keeps doing his SIPs month in and month out.

On the contrary, there's every chance you mess up the whole process and end up with a worse outcome.

Let me illustrate with the help of an example.

December 2007 was one of the worst times in recent years to start investing in the market. Why? Simply because it was the month that marked the top of the 2003-2007 bull market.

And December 2008 was one of the best times. Why? Because between December 2007 and December 2008, markets fell more than 50%. Hence it was quite close to the stock market bottom.

So, imagine two investors, one starting an SIP at the worst possible time i.e. December 2007 and another one starting in December 2008, the best possible time.

Well, more than fourteen years later, both the investors would have earned almost identical returns i.e. a CAGR of a little over 12%.

Yes, you read that right. Over a period of more than 10 years, it doesn't matter whether you invested at a bull market top or a bear market bottom.

Keep doing your SIPs without worrying about the market levels. They will most certainly end up giving you good returns over 10 years and more.

However, what it your investment horizon is not 10-years but something like 3-5 years? What if you are not doing your SIPs but have a lumpsum amount invested in the stock market? What if you depend on it to manage your day-to-day expenses?

Well, in that case, a 50:50 portfolio rebalanced ever year or a 60:40 portfolio or even a 70:30 portfolio is the best option in my view.

How does this work?

You decide on a certain allocation at the start of the year, say 50:50. Then rebalance at the end of the 12-month period.

If the stock portion goes up, you sell some and move the money into bonds or FDs. If the FD portion goes up, you take money out of FDs and move them into stocks.

This arrangement will ensure you take advantage of the superior returns the stock market gives you and you also have enough liquidity to take care of your expenses.

Another important element of this strategy is that it allows you to book profits after every significant rise in the market and take more exposure after every significant fall.

Thus, if you are this type of an investor then perhaps right now is the right time to move some money into bonds. This is because the markets are still close to their all-time highs. You can again increase exposure later when the markets correct and are down significantly from current levels.

Last but not the least are the types of investors who are of the enterprising type. They want to earn market beating returns over the long term.

They are willing to put in the time and effort to study different businesses. They will also study the history of the market so they can develop a process to earn market beating returns.

What should these types of investors do in the current market environment? Should they sell, hold, or buy more of the stocks that have fallen from their highs?

Well, I would classify such kind of investors as mostly of two types. The ones focused on valuations and the ones focused on the underlying businesses.

The ones that are focused more on the underlying quality of the businesses shouldn't worry about a correction of any kind. This is as long as the long-term fundamentals of their businesses are intact.

Their only reason to sell should be if the fundamentals take a turn for the worse or if the business has entered a mature or a declining phase in their growth cycle.

If this is not the case, then they shouldn't worry too much about the price. In fact, they should use every such opportunity to maybe buy more of their favorite stocks at marked down prices.

Now, coming to the last category, the one that I tend to incline towards. We are usually of the belief that there are times when a large number of decent to good quality stocks are available cheap. Then there are times when they are available at expensive valuations.

Thus, a good strategy here is to exit the ones we think are fully valued from a 2-3 year perspective and conserve cash. This is for the time when they will turn attractive again.

As few stocks are trading at attractive valuations currently compared to March 2020, cash levels have to be higher right now than back then.

Across my services, I'm recommending a cash level of close to 50%. Will this allow me to earn market beating returns over the long term?

Well, I can't guarantee that. In fact, there's no one who can guarantee their approach is the best.

However, I'm confident this strategy allows me to be fearful when others are greedy and greedy when others are fearful. And this certainly tilts the odds in my favour as far as earning market beating returns are concerned.

So, to recap, you should sell in the current market if you have a 3-5 year horizon, and you depend on your corpus to meet a large part of your expenses.

You should also sell if you are focused more on valuations than the underlying business.

However, for the other two categories, a weakness in the broader market is no reason to sell.

Their sell decision should depend on something entirely different. It should be specific to the underlying businesses or their own long-term goals.

Let me know whether this approach makes sense to you.

Happy investing!

Warm regards,

Rahul Shah
Editor and Research Analyst, Profit Hunter

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