The say fear and greed are the two major driving forces in the Stock market. Paroxysms of these two factors have been seen, all through the stock markets’ existence, all across the World.  Now, there is a bit of caution left in the markets and people who were given to euphoria at the previous highs, want to know if it is the right time to cash out. But, if the stock market continues it’s upward climb by, say, another 10% or more, the euphoria will take over and could drive the markets higher still.

What does one do at these levels of the market?

For one, profit booking could be a good idea, for those who want to play it safe. At least they would be able to lock in on the profits, that way.  Cashing out entirely, like many want to do, is not a great idea. This will be a good idea if we had foresight about the downward movement of the markets. But, that is anybody’s guess and hence cashing out entirely is not a great idea.

Another move could be to move a portion of the portfolio from Equity to debt.  In case of Mutual Funds schemes, this is easily achieved by moving from  an equity fund to a debt fund. If one has invested in direct equity, then cashing out is the only option. Such investors would want to wait it out till the market moves lower and reenter the market. Till such time, one could stay invested in short duration debt funds or flexi-deposits in banks.  This way, one could optimize on returns from the funds waiting to be deployed and also have the option to access it anytime they want. Most investors would want to re-enter by making investments in small tranches, so that any further fall can also be captured.

A better strategy would be to initiate an STP for a somewhat long duration, say 3-6 months and not try to time the markets. Timing the markets is anyway difficult and does not work well, even for the experts.  STP is a low risk route. If one has moved from an equity fund to a debt fund and from there have initiated a long-term weekly/daily STP, that could possibly prove to be the best idea. In this strategy, one has locked in the gains and would also potentially invest back at lower levels. This strategy will not work only if the markets keep going up continuously over the duration of the STP, which is 3-6 months. Continuous upward movement without letup seems unlikely. Hence, this could turn out to be a smart move.

Another evergreen and low risk route to invest in the market is through SIPs. That continues to be a weapon of choice for those who want are looking at long-term wealth creation.  This can be done at the height of the market too, as this is a long-term investment and is definitely bound to participate in the ups and downs of the markets, thereby lowering the average purchase price for the investor.

When the stock market moves up, the equity asset share becomes higher than the desired level.  Asset rebalancing may be in order in some of the cases. For such people, the money that comes out after cash-outs can be allocated to debt investments. For these people, the market movement does not matter as investments are going into denb instruments.

For those with long-term goals and who do not worry about every turn of the market, the turbulence in the market,  does not matter at all.  They need to just focus on proper asset allocation and not worry too much about the market movements. Getting the mix right over the years is more critical for them. Cashing out for them would be primarily for meeting the goals, which needs to be managed properly. Properly initiating cash-outs, 6-12 months before the money is necessary to meet the goals. Proper easing out from equity to debt would be crucial here. A slow cash-out over the period of, say, 5-20% of the portfolio, as per the market conditions, would be a good idea. Investments need to be made in such a way that they are not exposed to interest rate risks and will earn a reasonable return till the amount is required for the goal.

What is undesirable is to get carried away by the markets at this point and start deploying all available amounts, hoping that the markets would rise further. Rise, it could… Fall, it equally could. Hence, knowing what your position is and acting accordingly, will be the right thing to do – not what the next guy is doing- for that may be your undoing!