How Long Should You Hold a Stock?
It is no secret that timing the market for higher returns is next to impossible. The volatile and unpredictable nature of the market makes knowing the minimum time to hold stocks even more complicated.
Your selected stock might shoot up the day you buy it, or it might turn out to be a loss-making investment. And that’s why you, as an investor, need to plan the holding period while buying the stocks.
The investment horizon will depend on your investment strategy and approach and also the market conditions. It ultimately comes down to your perception of the market. If you think you can tackle the short-term fluctuations in the market, you are good to invest.
Generally, stock markets tend to trend upward in the long term. Therefore it makes sense to invest for the long term if your goal is wealth appreciation. Buying and selling stocks for short-term profits is more speculation than investing.
Warren Buffet once said: “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
When to Sell Stocks?
In normal market conditions, booking profits when unrealized gains are more than 20-25% is considered a winning bet. However, you may consider exiting your open position if you think the stock has reached its uptrend potential. This can be analysed either via fundamental analysis or through technical indicators. Alternatively, if your opinion about the stock has changed over time, and you no more think of the stock as a winning bet.
It is also worth noting that stock prices might fluctuate in the short run; but in the long run, the market has given good returns. For instance, if an investor purchased, say HDFC Nifty 50 ETF in 2015 for Rs 71, if he/she continued to hold till now, the returns will be more than 170%. HDFC Nifty 50 ETF is now trading around Rs 193.
Why Long Term Investments Are Good
Compounding does all the trick here!
Staying put after investing in quality stocks will allow compounding to unleash its goodness. If you are invested in stock from lower levels and still find the risk-reward ratios favourable, adding more quantities on dips and averaging out your investments may be considered to reap better returns in the future.
That said, selling stocks fearing loss or sudden price falls tends to hurt the portfolio. You might save some money in the short run, but you could be giving up on possible multi-bagger returns. This can be reaped by holding shares for a long period.
Let’s bring in some facts!
Examples
Let’s talk about Nifty. Not long back, only a year and a half ago, during the early days of COVID-19, Nifty levels were dwindling and were a point of concern. In March 2020, the market hit circuit levels, and the Nifty tumbled to fresh lows of 7500 points. However, that was a turning point.
Of course, a once-in-a-lifetime pandemic struck us and changed some things forever, but the course of the market has been unstoppable and resilient, to say the least. The Nifty recently breached the 18,000 mark- that is almost a whopping 250% return in 1.5 years!
Those who held tight to Nifty even in its days of struggle in 2020 and those who showed patience and bought the dips made enormous profits.
Should We Hold a Loss-making Stock?
Ideally, one should cut loss-making stocks and rebalance a portfolio once in a while, but that doesn’t translate into selling wildly and panicking from small corrections. The market has responded to staggering highs with small corrections several times.
When dealing with loss-making stocks, follow the following three rules to find out when to sell stocks yielding negative returns-
- Sell the stock if the losses are beyond the risk-to-reward ratio you planned for that particular stock.
- Sell the stock if it falls below your stop loss or strong support zones.
- Don’t hold a stock for tax-loss harvesting because, in the quest of saving a few bucks in taxes, you’ll end up losing too much on the stock.
What is the Ideal Holding Period?
If you are not running short on funds, staying invested until your goals are realized may be the best way forward. Some investors advocate staying invested for years.
Thus investing strategies vary for each individual and depend on their risk appetite. It should be aligned with investment goals rather than what others are saying.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.
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Research Analyst - Aakash Baid