Concept of Profit Booking…When Markets are All Time High

The 3 most immature advice by so-called matured (by age or experience only) agents in favor of profit  booking when markets are all time high are:

• Markets are no one’s relative, You should run what you have and exit.
• Stop your investments. STOP YOUR SIPs for the moment.
• Let’s switch investment to liquid fund. We will book profit and again shift back to equity.

I am sure you all must have received these pieces of advice that you should exit or switch your funds when the market is all time high. This will save your profits and increase overall returns. Is it so?

Well, I am gonna break these myth related to profit booking with data today.

After reading this post, next time you will be in a better position to respond to these “Profit Booking” advisors. I will even call it mis-selling as it leads to benefiting your advisor and not you. Let me prove that to you.

These are the typical baseless kind of logics you receive when markets are all time high:

• Market is not any one’s relative or personal friend

Yes, markets are not a person so they do not try to imitate human being characteristics. Markets are just logical means to earn, take ownership of business you are not running. They are medium to negotiate prices for that business.

If you are scared like “machines taking over humans” kind of Terminator things… I am sorry you are not worthy to invest in equity. Please stay away. I have not seen anyone becoming wealthy by exiting on highs. Everyone who has made a worth from equity investments has held on to equity when the markets have been high or low too. Be it Warren Buffet, Bill Gates, Azim Premji, your Mutual Fund Manager or your Pension Fund.

• Profit bookings increase profits:

 No this is a huge myth too. If you exit you can be on sidelines when markets are increasing every day. Yous advisor will make you shift to a liquid fund earning 6%-7% annually, where you could have been making more tax-free money as a reward for your patience.

 Sometimes “Profit Taking” call is advised because advisor has new opportunity to make money. A New Fund, close ended. Now, this is why it is profit booking for an agent and not you. He takes advantage of your fear.

 Never take an advice from someone who himself is scared of his subject (Equity Markets).

See, agents and brokers do not get money or less money when the portfolio is having no action. The sell and buy make them money. So they will become your most trusted family man and recommend you something like this. When you churn due to fear of losing, they make money and remain in business.

Can I prove it? Yes, look at the image below. This is when people excited when the markets touched all-time highs. The funds were switched from equity to liquid funds which too made around 7%.

But this strategy of profit booking has failed miserably. Investor lost huge money.

Look how investors got the benefit of remaining in the market and not running. You have to be patient and think equity as long term friend.

• Another Classic Lie: STOP YOUR SIPs

I am a vivid watcher of MF trends. When in April 2017 media constantly printed news that 4200 Cr is coming from SIPs alone in the market, they forgot a point to mention.

SIP figures have come down from their peak figure of March 2017. How can figures come down that too in crores?  So-called smart Investors or advisors have started advising to stop or postpone SIPs.

I agree for a lump sum, if you do not have an appetite for downfall or volatility you should not invest but what about committed savings? In SIP when rates are high, you are automatically buying less quantity. Isn’t that fair and logical? I think you started a SIP for benefiting from Rupee Cost Averaging? But if you do not buy for a fair amount of time, how will averaging work?

The best part of a SIP is that you do not have to do the most difficult part of timing the markets. Most people try and fail to do so. That is the reason we invest in SIPs.  SIPs work on the basis on rupee cost averaging. You invest a fixed amount every month. When the markets are high, you get lesser number of units. When the markets fall, you get more units. This way, you end up averaging your cost. So, if you stop your SIP in the middle, you will lose the benefit of averaging your cost and may end up in the losses.

SIP is not for trading, it is only for investing purpose. SIP is meant for long-term wealth creation.

• One more careless advice: Do not start a SIP when markets are high

Many distributors are always trying to time the market when they know they are just a minuscule player in the ocean of wealth. They do not understand that it is a time in the market and not timing the market that is important. So, if you not investing in a long term bullish market you are shortening this time in the market.

The most common question investors ask is – Is it the right time to start SIP? Obviously, the correct answer is – Any time is a good time to starting SIP. One should always remember that SIPs shield the investor from market fluctuations with its systematic approach.

The automation -more units when the market is low and fewer units when the market is high, takes care of everything else. Smartness would be to obey laws created by nature and not your agent.

• Switching fund back and forth.

In the name of profit booking, the advisor switches your fund to liquid and then will withdraw a small portion as profit. He will switch back the remaining in the same fund back or some other fund of the same mutual fund company.

Pay attention, what this person is doing. He is taking the money to a liquid/debt fund and switching major back to equity. This switching (from equity to debt or vice versa) between 2 asset classes is considered sales in mutual fund industry. So advisor qualifies for higher commissions or contest which are run by the mutual fund companies.

So in name of profit booking, he is making his sales. And, you thought him as your WealthWisher!

So when is the time to book profit?

• When your goal date or time is nearing. In case you have the goal in sight you should consider transferring profits and investments in liquid or debt.
• You made a mistake in selecting a security and waited for tax benefit and exit loads to pass. In this case, you should exit completely and take a position in new fund or investments.
• In stocks, if your target price is achieved and you know the intrinsic value is more than the real value which is traded you should book profit. But this is only for stocks only.

In Mutual Funds

• Asset Allocation Itself makes sure you have booked profits at regular intervals. During your asset allocation review, you should require to sell profits and increase the debt portion you should book the most profitable asset first.

An illustration of yearly asset allocation:

• In mutual funds, you are paying fund management fees for NOT only for SELECTION of stocks but also for deciding when to buy or sell a particular share. So why you want to double poke? Let the trusted managers take their call to remain invested or shift to safer stocks or debt.

Bottomline

When you are fearful, people with vested interest take advantage of you. In name of profit booking, they will make profits for themselves. The best approach would be:

• Choose a man/firm of integrity to manage your portfolio.
• Go by your financial plan and Asset Allocation only.
• Never let tendencies of greed or timing the market surface in your thoughts.
• Keep things simple and honest.

Hope this article is on time and will save a few portfolios from dooming.

Do share it if you liked it. Also, comment what you think.