Markets at all-time highs: Should you exit & re-enter at lower levels?
The markets are high and they look overvalued. Many are worried about the expensive markets. But the bigger questions that investors must ask, are the following.
1. If it falls, then by how much?
2. What if it does not fall much; i.e., what if it is a time-bound correction and not a price-bound one?
3. ‘When’ will it fall?
Now, let’s apply this logic to the stock market. A lot of investors are in a dilemma: ‘should we book profits for now and enter again when the market falls?’
Let’s say you execute this thought and sell all your investments today with the plan of entering the market again when it falls.
And let’s assume your decision is proved right and the market falls drastically in the next few days or weeks.
If that happens, it is not good news. This is because if you are proven right in this decision, you will do it again in the future.
That is, you will ‘time the market’ again and again. And this is a bad habit. If you time the market 10 times in the next few years and you are wrong just 3-4 times out of 10, you may still lose money overall, forget about making great returns.
Check the records of successful investors. Do they follow this practice? If not, why? If they cannot or do not predict the market, what are the chances of you being right?
We have to be careful about the kind of actions we take, as they will become a habit. If this habit is a bad one, it will be very tough to leave it.
Now, let’s see if we can answer the three questions asked earlier.
1. What if there is only a time-bound correction?
Correction can be price-bound, the way we had in 2008 and March 2020. And it can be time-bound as well. That is, the markets remain in a certain range for a very long time.
1) From July 2009 till December 2011, again, the Sensex was range-bound.
After moving in a range, the market started moving up again in both cases. If that happens again in the next few months or years, your plan to enter at low values may never fructify.
2) From December 1993 till February 1999 (for more than five years), the Sensex was range-bound between 3000 and 4000 levels.
2. If it falls, then by how much?
Did you invest a huge amount in March 2020? No? Maybe because you were waiting for the markets to fall more. We, as humans, have this deep desire to buy at the lowest level.
And who tells you where the bottom is? TV experts, your advisor, neighbors, colleagues, or friends?
Investing at the lowest point and exiting at the top is a matter of luck, not research. Therefore, the best strategy is to invest at every level. Even at today’s level in January 2021.
In a nutshell, make sure you are conscious of the habits you develop while investing in the stock market. This is what differentiates a successful and not-so-successful investor.
3. ‘When’ will markets fall?
I know investors who sold their portfolios in July 2020. The market had recovered significantly from its March lows and economic activity had hardly started.
Logically speaking, it was the right call. Many investors and experts were expecting the market to fall again.
We are in December 2020 now and we all know what has happened from July onwards. It is not about being ‘logically right,’ but about developing the right habit.
I also know a few of these investors who entered the market again in September-October 2020.
It was not easy for them to watch the markets grow continuously when they had sold their investments in anticipation of a fall.