I have to admit that this is a difficult question. We always say that the right time to invest is anytime, as we will figure out the time horizon, risk profile, goals, and then structure out the investments as per the economic, and personal scenario.
But in case of exit, it’s not a simple answer.
Some may say, in fact all ask for exiting from investments only during tough times. If the investments are showing losses the bigger fear is that the value may go down further, and when in profits no one likes to lose the same. So on both sides only Loss aversion is at play.
However, in the former case, one may say to wait for the capital to recover, but still the question remains the same i.e. what is the right time to come out of Investments?
There has to be genuine reasoning for taking exit action, and that decision should be rational not emotional. It should not depend on Markets Movements.
This question was put before me by my Friend Mr. Sumit Bhandari, with whom I am doing some Q&A Videos these days. We have discussed this question in detail, and I tried to put my point of view here.
I think the EXIT strategy should be clearly defined at the time of Investments only.
When you give reasons to your investments, you should also define your reasons for when would you exit. If your Investment reason was Good Past Returns, then definitely your Exit reasons would be Bad Past returns, but this is not the way you should make and exit investments.
1. When you are near to your Goal:
Please note that I am saying “Near to” not when you have reached your Goal. It is wise to come out of your Equity Investments at least 3 years before the goal date. You may continue saving for the same but now in some safer options in debt.
See, when it is not advisable to invest in Equity when your investment horizon is upto 3 years, then it is also clear that you should not stay invested in the same when you have to withdraw after 3 years. In both cases the investment horizon is upto 3 years only.
It is better to follow this approach even if you have all the reasons to believe that Markets will bounce back in some months’ time.
The people who have followed this approach are among the better lot in today’s times as they are in a comfortable position to pay for their goals.
2. When you have to Rebalance your Asset Allocation.
While rebalancing you have to sell out some portion of the grown asset class and invest in to the fallen one.
his action on one side gets your profit booking done, and also let you buy low in the other asset class. You may refer to this article if you want to learn about Asset Allocation Rebalancing.
Please keep in mind that Even Rebalancing has to be done at some fixed pre-decided internal (like every year) or in some extreme dislocated market situations like when you see sudden big market movements.
Rebalancing sometimes becomes a difficult exercise, as neither you would like to come out of growing investments (in good times), nor you would like to buy more in the fallen one.
But this is the only process that keeps your behavior in check and also keeps your investments moving up.
3. In Extreme Situations, with justifiable Reason:
You must have heard of the happenings in the Franklin Funds. They have frozen their 6 Debt funds blocking around 25,000 crores of money of the investors.
I will not delve into the reasons and details of that, but the kind of Portfolio the schemes had, plus the kind of redemption pressure they had faced, in my view they were not wrong in taking this extreme step.
It was clear from the beginning that this fund house takes credit risk and if anyone is not comfortable with the same, one should not have entered this space at all. Or if in this kind of lockdown situation, which becomes a justified time to review the investments, and worry about the economy, then that again makes a point not to stick to the credit risk funds, and make the exit.
But if someone has had invested for the long term and is ok with the up and down of the economy and market, then it’s ok staying with the same.
The Franklin action is a HOT topic these days, and it is one of the unprecedented things that has happened in recent times, so it is easy for me to refer to the same.
But the whole point is if you have a specific reason other than Market Volatility like change in fund manager, consistent low-performance vis a vis its peers, Change in Investment Objective or strategy by fund manager etc. that makes another point to exit your investments and do the rebalancing.
4. When Personal Financial Management goes Out of Control
When you have no other option but to do it. Yes, better than looking out for some borrowing or live in stress, it is better to take action and come out of some of your long term investments.
For example, To Increase the emergency fund, to pay for hospital bills when the emergency fund and Insurance sum assured was not enough, when your invested funds get locked due to the things not in your control, so to manage the expenses or pay for the goals you have to redeem some other investments.
Like Investing, exiting is also connected to your behavior. In fact, exiting is much more difficult than investment. As here you either get trapped in a profit/loss game or you may have to accept your mistakes and admit that your selection was wrong in the first place.
But when you are following a disciplined approach like financial planning and have given all the reasons to your investment and review the process at regular intervals, you will yourself get to know what is the right time to exit the investment.