The stock market is very difficult to predict as there are a number of factors which directly or indirectly affect the markets. It is next to impossible to time the markets for higher returns as markets are highly volatile. Some of the factors which impact the stock markets are macro factors like changes in interest rates, tax rates, inflation rates, political events as well as global events. Industry as well as company specific factors also impact the individual stock prices.
The volatility of stocks makes them riskier as the stock you bought may shoot up the same day or turn out to be a loss-making investment altogether. When you have an exceptional stock in your portfolio, it raises questions like: How long should I hold the stock? Is this one going to be a big moneymaker? Similarly if you have a loss making stock in your portfolio, questions like should I sell the stock and book losses or wait for the stock price to recover. Certainly, there are no easy answers to these questions.
What does holding a stock mean?
Holding a stock means taking a long position in the market. It means that you think that the company is going to do good in the future & you are bullish about the stock prices.
Choosing whether to hold or sell a stock can be a difficult decision because there is no one-size-fits-all technique for holding/selling a stock.
That’s why as an investor you need a strategy to plan the holding period. An investment strategy is determined by a variety of factors, including risk tolerance, time horizon, and financial objectives.
Time horizon: Your financial goals set your time horizon. If your goal is saving for retirement or wealth maximization then you will invest for the long term but if you are planning for a vacation in the near term. your time horizon will be shorter.
Risk Appetite: Individual’s risk appetite is the most important factor in deciding whether to hold the stock or not. If you have a low-risk appetite, you may want to avoid investing in the short term as stocks are more volatile & it is more speculation than investing.
When to sell & when to hold?
The decision about when to sell & when to hold is made considering a couple of things, when market conditions are typical and there haven’t been any major movements, an unrealized profit and gain of roughly 20% – 25% is an adequate percentage and can be considered a profitable bet. However, if you believe that the stock’s current state and situation indicate that it hasn’t yet reached its full potential, you should continue to hold it.
Why long term investing is good?
Compounding is unabated!
“There will be good years and there will be bad years, but the compounding will continue on unabated.” ― Pietros Maneos.
Compounding is nothing but earning interest on interest. It means rather than paying out the interest it gets reinvested into the principle amount.
Holding quality stocks allows compounding to work its magic in the long run.
It is advisable to hold good quality stocks for the long term and invest in them through the SIP mode rather than lump sum to average out the highs and lows in the prices and ensuring better portfolio returns in future.
An investment of Rs 10,000 in Infosys in June 1993 would have delivered you 2,973 times return! Which means that Rs 10,000 investment would now have been worth Rs 2.97 crore at a compounded annual growth rate (CAGR) of 39 per cent.
Should you hold on to losing stocks?
Once in a while portfolio rebalancing is a must, it helps to cut out loss making stocks from your portfolio. But this doesnt mean that you wildly sell stocks with small corrections. Loss making stocks should be sold when the losses go beyond the risk to reward ratio or the price drops down below your stop loss.
Ideal holding period!
If you have enough liquidity then keeping your funds invested for a long run or till your goals are realized is advisable. To reap gains from long term investing you should focus on stocks which have strong fundamentals. Value stocks with strong fundamentals are often linked with long-established companies that have demonstrated sustained growth rates, relatively stable revenue, and consistent profitability. The objective is to buy stocks that are trading at a significant discount to their fundamental value (i.e. they are cheaper than their real value). When you purchase an undervalued stock, the price gradually rises to its intrinsic worth, resulting in a long-term profit. Investing in value stocks is not meant to make you rich quickly but it will give you a fair idea if the stock is worth holding or not.
Conclusion: Long-term investing is found to be beneficial as historically markets tend to move upwards in the long run. Long-term investing gives you the time to ride out the highs/lows & corrections & downturns of the market.
If an investor is unsure as to how to develop a strategy or plan, they should educate themselves or contact a SEBI Registered Investment Advisor (RIA). RIAs are professionals who are qualified and offer unbiased investment advice.
Disclaimer: This write up is solely for educational purposes.
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