Deciding whether to buy or hold or lock in profits

With Nifty trading at an all-time high, a common question investors have is whether to book profits or continue investing at current levels.

FinSharpe conducted a long-term backtest of the Nifty 50 from January 5, 2010 to January 1, 2024.The analysis was conducted in two scenarios: buy-and-hold vs. profit booking.

Scenario 1: Buy and hold

In this case, the investor simply bought the Nifty 50 and did nothing.

An investment of Rs 100,000 turned into Rs 4.11 million.

Scenario 2: Profit reservation

Book a profit when your portfolio reaches 30% return and reinvest that amount within two months.

In this case, the investor continuously monitored the portfolio. Whenever the profit exceeded 30%, the profit was transferred to cash and reinvested within two months from the date of profit recognition.

Investment of 100,000 rupees turned into 3.88 million rupees

This includes a 0.25% transaction cost.

Why does this happen?

This portfolio has the potential to achieve a 30% return in a bull market. This goal was achieved in 2014, 2017, 2020, 2021, and 2023.

All of these years were bullish years, but before that the market was mostly sideways bearish for long periods of time.

Timing the market and locking in profits can lead to underestimating the size of the rally and missing out on outlier years.

If we take 2023 as an example, we believe that the overall market performance was significantly higher.

The return of Nifty Midcap 100 Index in 2023 was 46.57%.

When you record profits, it is psychologically difficult to reinvest them. This means your portfolio is likely to grow on a smaller basis or be reinvested at a higher level.

Does this mean investors should never book profits?

Absolutely not.

When to record profits

The following are scenarios in which investors may lock in profits.

1. Achieving goals based on goals

It is important to set clear goals before investing. Depending on your WHY, you may have goals such as higher education, early retirement, or buying a home.

If this goal is achieved, it will be time to book profits as the market is at an all-time high. It is important not to be greedy and seek high goals just because of the market situation.

If this goal is not achieved and there is still time, timing the market and re-entering at a lower price is futile. Because it’s difficult to do consistently over a long period of time.

If you’re close to your investment goals, locking in partial gains and reinvesting them in bonds can also be a good strategy to lower your portfolio risk.

2. Maintaining asset allocation

If you are investing in different asset classes such as equities, gold and debt, depending on your risk profile it may be recommended to stick to an asset class allocation of 50% equities, 30% debt and 20% gold. There is a gender.

With the stock market currently at an all-time high, stocks may be more heavily weighted in your portfolio. This may be a good time to rebalance your portfolio so that asset class weights are maintained. Failure to do so may expose your portfolio to higher than expected risks.

At such times, it is best to consult a SEBI registered investment advisor who can suggest the right course of action. This reduces mistakes that investors can make out of fear or greed.

Rohan Borawake is co-founder and CEO of FinSharpe Investment Advisors, and Sabir Jana is co-founder and head of quantitative research. Views are personal and do not represent the position of this publication.