Should you time entry and exit in equity market?

Jaineel is not sure what lies ahead for the equity markets. While those around him seem to be investing, he is keen to quit. He invested at the last top and does not want to commit the same mistake again. He is convinced that there is no point in following the crowd, and thinks that it is good to leave when others are buying. He is one of those who think that in order to make money in the equity markets, one should get the timing right. However, he has not been able to time the market so far. What should Jaineel do?

At the time Jaineel had invested, everyone seemed very optimistic about India’s economy and the equity markets. That the market had peaked is known only after it crashes, at which time it is too late to quit. No one can time the entry and exit right, which is why Jaineel should stick to simpler rules.

Whether he should invest in equity or not, should be guided by his goals. If he has long-term goals, which need protection from rising inflation, he needs equity markets and the capital appreciation that they provide. The average return from equity is high, but is not achieved year after year. By quitting at the end of six long years of low return, Jaineel may be missing out on an upcycle that can help him average his returns out. It is only from staying in a rising market that he can hope to earn a better return in the long run. Therefore, to quit or to stay invested will depend on whether or not he needs to earn a higher average return for his goals.

As for how much to keep and how much to take away, Jaineel should stick to an asset allocation plan. If his goals require 60% investment in equity, that exposure should be maintained. When he books a profit, he has to find another asset to invest it in. However, limiting his exit to this percentage will help him manage his investments better. He will stay through rising and falling markets and manage to achieve the average return. Jaineel should quit only if he has decided that equity markets are not for him. In that case, he should invest more to achieve the same targets, since his returns are likely to be lesser. He might harm his returns if he chooses to quit now, only to come back again after the markets have risen. Investing a proportion of the savings consistently, is what will help investors like Jaineel who may not be market experts.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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