To Hold Or to Sell – Oh the Dilemma!

Investors who bought the dip when the market dipped in March 2020 or who remained invested right through till now are a confused lot. Although their equity portfolio is booming, there is no joy in their hearts, as the second wave of covid rages through our country.

The most oft-repeated question is, how much further will the market rally? When & how will it stop? Is a crash coming? Can you tell? What do you think? These are the ever-imponderable thoughts for which no one can ever have an accurate response.

The stock market has been oblivious to the heartache and pain all around us. It has risen almost 100% from the lows seen in March 2020 and is very close to all-time highs. Investors who are sitting on stupendous gains in some of their stocks and funds and now have a decision to make.

To Hold or to Sell?

Warren Buffett made a phrase famous….Cutting the flowers and watering the weeds! The most common tendency for a retail investor is to hold on to  stocks that are loss-making or not doing well and book profits in stocks that have zoomed

That is something one needs to be wary of.

Your profitable positions may have run up too much too soon and you may be nervous or greedy and tempted to take home some gains. And you may hold on (water) the duds because of a natural aversion to book a loss.

Every stock, therefore, has to be looked at dispassionately with a view on the sector and the specific stock to actionate a hold or a sell.  Banks in your portfolio may have doubled, like a State Bank & a stock like construction or a hotel stock may be languishing. Banks if held on to may lose gains and construction if sold now may start performing.

Tough to decide on what to do.

Here are some guidelines.

What will you do with the Gains?

If you sell your winners and lock in the gains, what will you do with it? Do you have a plan? Is there a home loan or a debt that can be paid off? Is there a planned expenditure for which you can set aside the money?

These are all good reasons to not regret selling some of your champions. It will take some stress off which can never be a bad thing.

What is my Reinvestment plan?

Do you have a plan on where to deploy the gains? If you have the cash in your account, where will you invest now? Interest rates and bond yields are almost at an all-time low. The minute you book profit there is a tax incidence.

Have a look at your portfolio with fresh eyes. Is your asset allocation right? Are you underweight on certain assets/sectors/stocks? Do you need to rebalance? It may make sense to book profits and invest in assets that you have been underweight on.

You can think about where and at what expected return will you deploy the gain. Make peace with that.

How does your portfolio look like?

Everyone has a portfolio but a plan guides their actions. If you have a strict principled asset allocation approach it may make sense to rebalance.

For eg: If your plan has an upper limit of 10% then it may make sense to readjust. What it means is that consider the overall value of your portfolio and in relation to that no one stock should be more than 10%.

If a stock zooms up and increases to say 15% of the portfolio, sell the excess 5% and invest in the others which are not doing well.

That’s a strategy which works in booking profits from your winners regularly while managing risks too.

Know Thyself!

What is your Risk tolerance? It helps if you know yourself and know what will cause you the most distress.

If a stock has s doubled and you sell and if to goes on to double again, will it cause you utter misery for missing the gain?

Or

If your stock has doubled stock and you don’t sell and you lose 50% of your gain, will this make you suicidal?

Knowing your own self while make you sleep well in the night. If you question yourself, you will be able to decide what will give you the most heartache and pain.

Selling too early and missing out on further gains

Or

Selling too late and seeing the gains evaporate.

Markets give you opportunities every minute to take action, so a measured one that suits your temperament is the right one for you.