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Market at an all-time high: When to sell or book profits?

ICICIdirect 8 Mins 28 Dec 2023

We will start today's article with an example. Please note that the company we have taken as an example is for educational purposes only. Some of you may know this company - Avenue Supermarts or Dmart.

Dmart's share has given exceptional returns to investors since its IPO in 2017. Currently, it is trading at around 4,000, but in October 2021, it touched a high of Rs 5,300. The shares are down 20% from their peak when the overall market is at an all-time high.

So, if someone invested in the stocks for a few years but missed selling them when the price was over 5,300, they missed the bus (obviously, you cannot time the peak). Yes, the price may go back to the same levels, but it may take more quarters/years. Selling at 5,300 in 2021 compared to 2025 (assumption) is a different return story. The point we are making is that investors need to learn the art of profit booking. It is even more essential at the current time when the market is at an all-time high.

The art of profit booking

Booking profits is a crucial aspect of successful investing. While it's important to identify promising investment opportunities, knowing when to sell and lock in gains is equally essential. Here are a few things you can do:

Set Clear Goals: The first thing you need to do is define your investment objectives, whether they are long-term wealth accumulation, income generation, or a specific financial goal. Align your investment strategy with your goals to guide your decision-making process.

In the above example, if you plan to hold Dmart stock for a long time (10 years or more), the current situation may not impact you. However, if you planned to sell after a few years—let us say 5 years—after buying it in 2018, you were better off selling in October 2021.

Why? If you have a five-year horizon, the best you can expect (ideally) is 100% gain. Dmart would have already given you a 3X return by October 2021. You can only do these calculations when you have set clear goals in the first place.

Establish a Target Price or Return: If you know the duration for which you want to hold a stock, you can estimate how much return you want from it, as discussed in the previous point. Determine a target price or return on investment that aligns with your goals. If you get the returns before that time, it is an indication to sell. For this, you need to regularly review and adjust these targets based on changes in the market, economic conditions, and investment performance.

Stay informed: You can expect a stock to give you a 15% return in a bull market in a year. However, in a bear market, having such expectations is not the best thing to do. Therefore, you should keep yourself informed about the financial markets, economic indicators, and news related to your investments. Please regularly review the performance of your investments and stay updated on any changes in the fundamentals of the companies.

When to sell or book profit?

Let us look at when and how you should book profits. Here are a few points that will help you:

Target price achieved: Let us say you bought a stock at Rs 1000, and at the time of buying, you set a clear goal: you want a 20% return on your investment. When the stock price hits Rs 1200, you should sell it. If the stock has strong momentum, it may be tough to make that sell call, but that is what you need to practice and learn – putting control over your emotions.

Partial profit booking: Long-term investors will have many stocks in their portfolio that have given them excellent returns (after spending time in the market). You can withdraw a part of your investment if you think such stocks still have steam left but may not give similar returns anymore. With this approach, your initial investment amount comes to you, and you continue to hold your best bets.

Use technicals to book profits: Here is an important thing to know - for all good stocks, there will come a phase in which they will rally. The reason could be result-driven, information-driven, or future growth-related rallies. After one such rally, the downward movement is inevitable—a correction is bound to happen, or at least it will consolidate. If you have stocks that have given exceptional rallies, you can use technicals to see the resistance levels, book profits, and reinvest the amount in another growth stock.

Goal achieved: Here is your goal: buy a car worth Rs 10 lakh in the next five years. In four years, you accumulated 9.2 lakh. Instead of waiting till the 5th year, you can book profits and keep the amount in a safer asset, as even an FD will get you close to your target amount. Also, you prevent a possible downside.

Near goal: In the above example, if you go too close to your goal and something similar to a pandemic happens, you will lose a large part of your profits. Therefore, every investor must learn to book profits before they come too close to their goals.

Before you go

After reading this article, you must be better prepared to handle the current bull phase and have some idea whether to sell your positions or not. Please remember that successful investing requires a combination of research, strategy, and discipline. Adjust your approach based on your personal circumstances and market conditions.

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