It appears volatility is here to stay and investors have to get used to it. The less aggressive investor is shaken by the market turbulence and abandons it for the more stable debt instruments. The risk-taking investor fishes in the volatile markets hoping to reap gains. Let us explore if it is time to buy, hold or sell your stocks.
Is it time to sell your stocks?
Here are some pointers:
Sell when over-valued:
This strategy assumes that when a stock's price shoots beyond its true values it is time to sell it off. You can wait for a market correction to buy it back after its price plummets.
Buy low, sell high:
Investors buy stocks of companies that are soaring upwards in anticipation of further gains. They seldom have the heart to part with stocks that are faring well. However, buying low, selling high is the key to successful investing.
You should book profits when they are soaring high, rather than selling laggards.
Sell to prevent further loss:
Set a lower-bound for the stock based on its fundamentals and growth potential. Sell the stock when it drops by a certain percentage. This enables you to exit with minimal loss rather than enduring heavy loss.
Sell when you rebalance your portfolio:
Suppose you have allocated 70 percent to equity and 30 percent to debt in your portfolio. The markets fare well and your equity exposure goes up to 90 percent. Rebalance your portfolio by selling off some of your stocks and bringing the percentages back into the original alignment.
Personal reasons:
Investors may require cash for exigencies. They might have reached their retirement savings goal or for funding their children's education. Then it is time to systematically liquidate the stocks before the markets fall.
Company's future bleak:
Increased competition from peers could leave a company grappling for market space. Sell the stock if the company's future appears gloomy and its quarterly results are not so favourable.
Is it time to buy stocks?
Here are some pointers:
Buy at fair value: A stock trading above fair or intrinsic value is considered expensive. On the contrary, if you buy below its fair value you could end up with good profits. Research analysts arrive at a company's true intrinsic value by forecasting its future financial performance based on projections on the company's income statement, balance sheet, cash flow statement, supply-demand and growth estimate.
Techniques like discounted cash flow analysis (DCF) allows analysts to arrive at a fair value of a company.
Buy and hold: This is a passive investment strategy where the investor buys and holds his basket of stocks for a long term, irrespective of price fluctuations. The investor must make shrewd stock purchases based on the companies' future earnings and growth potential, and underlying financials and business prospects. Since this strategy is employed for long investment tenures, investors can buy the right stocks despite market volatility.
Market timing strategy: Experts swear by their ability to predict future stock price movements, and buy stocks at the right time using this strategy. Both fundamental analysis and technical analysis is used by analysts to time the markets.
Fundamental analysis evaluates a business at the basic financial level. It attempts to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative dynamics, macroeconomic and company-specific indicators including percentage of available market, management, debt structure, asset allocation, sales, growth potential and earnings.
Technical analysts use statistical charts to determine uptrend, downtrend and horizontal trends. In conjunction with historical prices of stocks of specific companies, analysts use other variables before making trading decisions.
Buy at dips: This strategy involves buying a certain stock when it has already fallen to a level from where it is less likely to fall further. Using this strategy, investors could end up with good companies at discounted rates.
