Meet Nirav Shah, 29, a professional who had bought 300 shares of a particular company at Rs 375 per share.
The share price touched an all time high of Rs 585 per share within a month after he bought the stock. Like all of us Nirav too was very bullish as the market was climbing newer heights every other day.
However, for this particular stock, despite the fact that the market was increasing Nirav's share started plummeting. The price touched Rs 360 per share, lower than his purchase price soon.
He could even have sold half of his holding and booked a profit of Rs 210 per share when the stock touched its all-time high, but he didn't.
Does that ring a bell somewhere? Do you also know of a Nirav around you? I am sure many of you can relate to what Nirav did.
Welcome to the world of Indian stock markets.
If you have observed the Sensex's journey only after 2003 then it must have been a world of excitement and awe! The Sensex -- a barometer of what's happening in the stock market -- which traded at 3,500 levels then has reached an astronomical height of 20,000 in recent times.
But in the last few weeks we saw the Sensex touching 19,000 points in just four trading sessions and lost 1,500 points in just 55 seconds of its opening on October 17. The highest fall in a single day in the history of Sensex! Of course, true to its recent behaviour, the Sensex regained 1,000 points during the same day.
The next day it again lost 700 points to go below 18,000. Wow what a World! Or is it, oh my God, what's happening!
In times like these the biggest dilemma is whether to sell or not to sell, isn't it?
But then good investment decisions are those that are initiated at the right time. This brings us to a very important question: when should you sell your shares/mutual fund units? While, extremely difficult to answer, here's what you must remember if you too are wearing Nirav's shoes:
No one can predict the market. The right time is based on a factor called 'Expectation'.
Expectation can be fixing a target return on your investments. Let us take Nirav's example. Had he fixed a target return on his investment, say, he had decided to sell his shares when the price reached Rs 487 per share. He would have earned Rs 103.38 per share after deducting the brokerage charges on his buy and sell.
This would have amounted to almost 28 per cent return on his investments.
What he could have also done, but didn't, was he could have sold only 100 shares instead of selling his entire investment of 300 shares. He could have sold 100 shares at Rs 487 and the rest, again in a lot of 100, at different price points higher than his cost price.
This way he could have not sold his entire investment and simultaneously cashed on the opportunity of making partial profits.
This way Nirav could have been in a win-win situation, as he would have not only been booking profits but also retaining an opportunity to sell his remaining investment in case of further increase in share price. Unfortunately, he didn't and many of us, too, will behave like Nirav when faced with such a situation.
Coming back to expectation, it also means, saving for a goal, say buying a car or a house.
If you are nearing your goal and you are making profits in your invested shares/mutual funds book the profit to achieve this goal. You should not wait for further rise as no one can predict the market. If the value of your investment falls the whole purpose of investing is defeated.
You also need to pull out of an investment if all stocks or funds in a particular sector are performing and your investment in that sector is not performing.
It may mean that your investment might have gone sour. Accept it. Unless and until you are absolutely sure that it is just a passing phase it is better to get out of that fund or stock and redirect your funds to a better investment. Also, if the entire sector is not performing you need to re-evaluate your investment and if need be ready to book a loss and pull out of that investment.
With the rising market most of you would be tempted to invest money in stocks, which could almost distort your asset allocation and tilt your entire portfolio towards equity. In order to realign your asset allocation you should book profits to avoid over exposure to any one-asset class.
Everything depends on what kind of investor you are. If you are a long-term investor, ups and downs in the market should not affect you.
Also, investors in Systematic Investment Plan (SIP) should not try to exit and re-enter as it would be expensive (think of all the charges that you pay while entering/ exiting a mutual fund). Investors generally do SIP keeping long-term strategies in mind.
Lot is written on the right time to sell and why but not many follow the rules. More than rules our buy/sell decisions are tempered by the human emotions of greed and fear. On paper you might be making profits in thousands but one crash and your entire profit is wiped out.
Hope you still remember Nirav. For a long term investor regular volatility should not be a concern. For investors like Nirav who can afford to take risk as he is still young volatility should not be a problem. But that is not the case with everyone.
Try to stay emotionless in this world as once greed or fear grips you, you might make decisions, which you may repent later. Invest safely within your limits and understand your risk-taking, loss-making capacity.
The author is a financial consultant and can be reached at dhanplanner@rediffmail.com
More from rediff