Is it time to book profits from the portfolio?
Time spent in the market trumps over timing the mkt over the long run
The equities markets have created another lifetime high. The larger benchmark indices have been on a tear ever since the shortest bear market that we experienced last march. We're now witnessing the sharpest recovery in the history of the markets with major indices across the world notching up their all-time highs. This is at the backdrop of the one of the largest human suffering where the pandemic has infections have crossed over 100 million of the global population resulting in deaths of over 2.28 million.
Of course, to counter the spread of the virus, world governments have responded with lockdowns and restrictive movements causing widespread unemployment many temporary and some permanent with no clarity of the timelines for the normalcy.
The governments also have loosened their purse strings to release fiscal stimuli at their affordability with a coordinated effort from the respective central banks through monetary packages. This near synchronicity has not only arrested the economic slide but also manifested in a recovery that was not envisaged as the turmoil unfolded. While some experts note that the loose liquidity along with the helicopter money (loose fiscal policy) has led to the investors to rush into riskier assets driving their valuations up. Some other opine that as the interest rates dived southwards, savers looking for better returns were coerced to pursue riskier assets. Of course, with interest rates at zero or near-zero in the advanced economies, many forecasted the cost of capital for the businesses fell sharply which allows them to expand and thrive. This has led the prospects of assets like equity to do well with valuations at never-seen-before levels (multiples).
Another argument is based on the very calculation of traditional valuation model where the future cash flows are discounted over the risk-free return and thus the lower the risk-free return, the higher the possible valuation. This is making them to believe that the stock valuations are justified for the elevated price-to-earnings (P/E) and quality stocks should be acquired at whatever price. All these opposing views, however, are pointing to further rise in the equity valuations and thus newer highs for the equity markets.
For the ordinary investor, who were appalled at the jaw-dropping falls during March and the unbelievable rise thereafter are confused. They see that the Wall Street (stock markets) is devoid of the main street (real economy) and are not reflecting the actual conditions. This mismatch has ensued to continued redemptions (withdrawals) despite the newer highs in the market. So, is it time to book profits from the portfolio? This is a pertinent question that's confounding for many investors now-a-days.
Timing the markets is difficult as the market movements are unpredictable, especially to do it consistently over a period of time. So, while it's tempting for the investors to swipe the gains, it would turn into a predicament to what to do with those gains. Waiting for the markets to turn attractive for re-investment, again the timing of which is inconsistent. What if the markets continue to run-up post the rationalisation of profits, what to do with the booked gains? And the current interest rate scenario is unattractive to divert them into a fixed deposit or debt funds.
Compounding works well with time and studies have proven that time spent in the market trumps over timing the market over the long run. It's true that viewing the nominal gains wouldn't make us enjoy the fruits of returns from an investment, likewise, nominal losses shouldn't bother us. The best way to address this conundrum is through a defined asset allocation in tune with the life goals. This would allow an investor continuing to commit to the path of investing while enduring the volatility associated with the markets.
As each of the goals are defined, the sense of investing is frozen and these distractions could be easily overcome. This also resists from withdrawing the investments unnecessarily and the only timing is to match the goal requirements. While planning to invest it's always important to create a portfolio that allocates funds across the spectrum of the market in sync with the timelines. One should, however, first have clear provisions for emergency funds and also have sufficient risk cover to overcome exigencies through insurance.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])