When should you exit an investment?

This is a question that comes up in each of my wealth advisory sessions. Lately, with the stock markets going up, I see this coming up a lot more often than before.  

In the past 12 months the BSE Sensex has gone up by 36%. Every week it is scaling new highs and even though every investor is happy seeing his portfolio go up – he/she also knows that it is only paper money, till the stock is sold and the money comes into your bank account.

So the question is - should I sell my stocks?

As per me – there are only three reasons for exiting an investment. They are:

1. You need the money for an expense - for example you need money for a planned car upgrade or an unplanned hospitalisation.  You have investments giving you great returns – but what to do – you need to sell them and use the money for these expenses.
2. Your investment is not expected to do well in the future – You invested few years back and the investment was giving you the planned 20% per annum. But now situation has changed and your believe that in the next 2-3 years, this investment will not give you 20%. A good example is Gold - Gold gave great returns in the period 2008 to 2011 – each year it gave more than 20% per annum. However in 2012, it gave just about 11% returns and in 2013 it gave negative returns ( -14%). And this year too it is not doing well. If your forecast is that Gold will continue to do badly in the future, then it is best to exit gold (if you have not exited it already).
3. When you get an even better investment option:  You have invested in Asian paints and it is giving you a steady return of 25% per annum and you are happy with it. And then you get a chance to invest in a real estate scheme where the returns are expected to be more than 25%. Then you must exit the investment in Asian paints and move your funds to the real estate scheme. Remember that the real estate scheme may or may not actually give the returns - but at this point of time, you are confident of your forecast.

These are the only three scenarios when you must exit an investment.

Now coming back to the current question – should I sell my stocks at the current levels?

Well it depends on your view on where the markets will go in the next 2-3 years.

If you believe that it will not go much higher than the current levels, then you are essentially looking at scenario 2 listed above. In that case, you can exit.

If you believe that the stock markets will go still higher and this is just the start of a multiyear bull run – then you must stay invested and watch your investments go up and up.

Where do I stand?

I believe that we are getting into a multiyear bull run – expectation of good governance, easy flow of money from Europe and Japan, India’s growing domestic consumption story and increasing exports to US markets are the reasons why I am optimistic.

My current stock portfolio is giving me a 75% return over the past 12 months -here is a screen shot.

But despite this good performance, I am not selling my stocks. They are hand picked over time and are giving good returns. So why sell?

However, I have sold one stock this week - I have exited Jubilant Foodworks – my non performing stock for past 2 years and I will figure out where to invest in this week - likely to invest it in HDFC Mid cap opportunities fund where I believe there will be good returns over the next 2-3 years.