When you need to come out from your equity investments?

Every Financial Planner advise you to invest in Equity market to get good returns. Also it is proven thing that equity outperformed other asset classes over long run. But have you ever thought what will happen to your equity investments when you face the situation like 2008-09 recession exactly nearer to your financial goals? It is devastating effect on your investments. It may not erode your whole investments but to the extent it may harm your financial goals. Then what is need to be done? Is Equity worst investment? No…..But need cautious planning like when to enter equity and when to exit from it.

When you actually look at USA’s historical recessions, you notice that they took minimum from 6 months to maximum 4 years to recover. Same things may reflect over other countries too. So we can’t predict now the future recessions time span and when they can affect our economy. Instead if we plan our equity investments in a good way then we can atleast reduce the impact. Below are the few points to remember about entry and exit of equity market.

1) When to enter equity market-When you look at majority of investors who invested in equity related instruments, you will find that they lost more than profit making. Reasons are many. Few of them are-lack of knowledge, short term strategy, based on hot tips, based on friends advise who told them to invest as that friend generated huge profit from equity investments, entering market when actually investors are booking their profits, based on TV shows (my next post will on these funny shows). So you need to enter market based on your goal’s time horizon. When your goal is long term like more than 5 yrs it is always best to park your investments in equity. Do your research like in what way you want to enter, either direct equity (if you are expert and time to manage them) else mutual funds route. Again while selecting direct equity or mutual funds you need to do lot of research or take the advise of well qualified adviser. Once you finalized the products then enter with SIP route. SIP is best proven method of entering into equity instead of one time investments. You may have noticed during bearish market trend that few news papers or media will publish data and shows you that SIP not worked well during the time frame they considered. But never judge the performance by merely looking at short term like 6 months to 1 year. Give enough time to equity and equity will definitely provide you a good returns.

2) When to exit equity market-As I told above, it is the timing of your exit from equity market will also make you easily achieve financial goals. It is common practice by most of financial planners that they recommend clients to invest for full term of their goal horizon into to equity. For example, suppose you have 1 year old kid and you are planning to start investment for your kid’s education, which you need to accomplish at your kid’s age of 18 years. Then your adviser or planner will design you a plan where you need to invest for the all remaining 17 years into equity market through SIP route and they will not in contact with you or never look at your investments how they are doing during that 17 years period. But it is wrong what they are doing. Best practice is to evaluate your equity performance on regular bases like once in 3yrs or 5 yrs. Slowly try to reduce your equity exposure to debt. Suppose in the beginning of your investments if your equity exposure is 90% and debt 10% . But when you are about reach your goal then the exposure towards equity need to be 10% or less and debt 90% or more. Which will automatically protect your investments from such recessions or market down trend.  This activity is called re-balancing of your portfolio. One more strategy to secure your investment is, move your all equity investments to secured investment when you are about to reach your goals like 3 yrs to 4 yrs earlier.

Hope you got a few inputs like when you need to protect your equity investments. Happy investment !!! 🙂

4 Responses

  1. Agreed basu,

    but if i start shifting equity investments to secured product when near to goal, how about the componding. will it not get affected?

    please guide.

  2. I enquired about fixed deposit interest rates….. there are many types of fixed deposits. Its the depositor who has to select and specify the type when depositing. simple interest deposit leads to interest on deposit as monthy income and gets free to be drawn by the depositor from his sb a/c. where as cummulative FD leads to accumulated deposit which is principal + interest

    1. FDs are usually compounding. Like SBI FDs are compounding quarterly. As you mentioned, it depends on bank and tenure of FDs you are choosing. Saving account interest what you will get is simple interest which is presently calculated on daily base.

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