A lot of mutual funds and stocks have doubled based on the performance of the past year. Stock markets continue to peak, but the economy as a whole is still struggling to come back to full force
To obligate. As a result, blocks are still enforced and there is general concern of a third wave.
In this context, there are two groups of investors. One group wants to make profits for fear of losses due to an overvalued stock market. On the other hand, there are a large number of
investors are waiting to enter lower levels.
Let’s focus on the first set. Should Investors Report Profits Now? If not now, then when? The economy and the markets may not be related – Investors fearful of the macro-climate should remember that often the economy and the stock markets are not related. Markets are generally forward looking and are based on expectations rather than reality. For example, the US stock markets recovered in 2009, while the economy recovered in 2011 from the financial crisis. Therefore, blaming the economy may not be worth it.
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Reinvestment risk – Investors who want to register profits usually do not think about where to invest the money after registering the profits. Money invested in the markets is less of a headache than money deposited in a bank account. Therefore, unless investors are sure where to invest the product, they should not make a profit.
Buy at lower levels – Investors may be tempted to synchronize the markets by selling high and buying when the markets are at lower levels. Unfortunately, countless studies have shown that it is simply impossible to time the markets. Investors posting profits may have to wait months, maybe even a year or two, to enter lower levels. Hardly anyone in history has succeeded in timing the markets consistently – so be careful listening to stock market experts advising you on market timing strategies.
So when should an investor make profits or sell their mutual fund portfolios? There are two excellent reasons.
1) Achievement of financial objectives: One of the best methods of investing for the long term is goal-oriented investing. It keeps investors disciplined, focused and guarantees a savings mindset. When investors invest for specific financial goals such as a car, house, children’s education, and retirement, it is prudent to sell the investments after the goals are met. Investors should keep in mind the tax consequences of selling mutual funds before realizing funds to pay their goals.
2) Rebalancing portfolio: Besides goal-oriented investing, which requires disciplined investing over many years, another important step is to periodically rebalance portfolios.
What is rebalancing?
Suppose the investor invests 60% of his savings in stocks and the rest in debt. Over the years, the share of equity will grow at a faster rate than debt investments. In this scenario, it is prudent for investors to sell stocks and reinvest in debt funds. Without rebalancing, an investor’s portfolio becomes riskier every year. On the flip side, a stock market crash is when investors can use rebalancing to increase the allocation of stocks by buying low. If done right, rebalancing ensures that investors consistently buy low and sell high.
In conclusion, the reason for selling equity investments is either to achieve a financial goal or to rebalance portfolios. Anything else besides these two is likely to do more harm than good to your return on your investments in the long run.