Any financial planner would advise you to “invest in equities for the long term”. But the basic question that arises is – how long is long term? Is it three years, five years, 10 years or, as legendary investor Warren Buffet says, “Our favorite holding period is forever”.
Well, for lay investors, ‘forever’ may not be possible because they invest money in equities to make sure that they are able to achieve their goals. For instance, you might be investing for a car or a house that you want to buy in five years.Staying in equities for a long term is the key to building wealth. But this cannot be achieved if investors fail to book profits regularly.But before one sells, always remember to see the value of the stock. A simple way to do this is to study the price-to-earnings (P/E) ratio.
To be on safer side, you can always segregate your Stock Holding in 2 parts i.e. Investment and Trading.
1. Volatile Stock Markets: One of the key and prime reason to book profits at regular interval is that stock markets are more volatile compared to the past. Imagine the impact of a small economy like Greece on worldwide markets.
2. Emotional Investors:Over a period of time, We fall in love with our shares/stocks so much that we don’t want to sell.Among all the assets loved by Indians like property, Gold and Stocks if the investor is not emotional towards asset then opportunity to easily book profits exists only in Stock Market. To overcome the emotional dilemma, you can always re-enter the counter at lower levels.
3. Volatile Stocks – No Clear Winner: As i mentioned that markets have become volatile, similarly stocks are also volatile i.e. there are no clear winners. It is another reason to book profits at regular interval. The winner of today might be the laggard of tomorrow.
4. Average Out: One of the strategies adopted by investors is to average out when the share price drop. You never know what is the bottom of this stock and visa versa
There are, however, some clear ‘don’ts’ when it comes to profit booking which apply to every investor.Don’t book profits simply because you think markets are at a peak, or in a panic when everyone else is selling. You have to evaluate your particular stock or mutual fund independent of the market. Secondly, as experts rightly advise, don’t sell too soon; discipline your holding period so that you can ride through an entire growth cycle.