Should I invest, should I book profit or should I wait for correction and then invest?

This doubt is in the minds of many normal investors w.r.t investment in equity (direct stock or through equity mutual fund). I am referring here to long term investors and not day traders.

The cause of this doubt is market indices are very high, good return has come last 1 and 2 years so confusion is will market go further up or correction is round the corner?

The concern is more on downside risk. So, let’s talk of action on possibility of that.

Two factors can affect this downside risk: economic and market. Economic factors seem in control and no negative triggers or indication there. Government and its policies are toward growth so no risk is visible from that side as of now. Market risk is always there. Market is dominated by greed and fear. Market moves as per dominant participants behaviour which looks bullish as of now. How long it will remain bullish, difficult to say. When can suddenly it turn into profit booking mode difficult to say? One should know that long term trend of economy and market are positively correlated (behave same way) but short term it can vary. Concern today is of short term and not long term. So tomorrow if for some days or even few months correction happens (downward risk) it might be due to market behaviour in all probability and not economic reasons.

Now what one should do in such scenario.

If anyone requires money in next 1 year and has already reaped a good 1 to 2 years return then better to book profit, move to safer asset (debt). Strategy is protecting your growth.

If anyone wants money in next 1 year onward to say 3 years, Then, correction if happens might leave him with a low return. Maybe he can book profit on 20% of holding, put that in debt. Be watchful and put some limit order range (in percentage terms or price terms) on either side (rise or fall) and keep booking profit of 20% subsequently. Ultimately correction will happen but no one knows, when? If he finds sudden big dip then can move all in one go. Remember the proverb, “There no use of crying over spilt milk”.

If anyone wants money say after 3 years to 7 years then for him correction can put some notional loss but strong economy can help to bounce back and recover this notional loss. Same strategy as above but instead of 20% can have 10% of holding to book profit. In case big dip then value protected but if economic factors remain strong then market will bounce back and might go to greater heights. Can put back money in equity after big dip and restart of next upward trend. Strategy is protecting the growth and getting back to growth path after normalcy.

If someone wants more than 7 years then in my view should not book profit but have patience, stay invested. Be mentally prepared for notional loss if any in short term.

Two things might be coming in the mind of some readers: (1) If for short term need one has ensured through existing debt investment then why to redeem equity as debt is there (2) why there is conviction of correction anytime in next some months.

Let me address first one. Even if you have debt which might have given you say 7% return, in case you liquidate that then that becomes 0 as no investment left and God forbid if loss on equity, then your loss looks more. If you keep that 7% return generating debt intact and book profit for some holding (10% or 20%) from equity then irrespective of indices or price of security/fund move in any direction you gain only vis a vis debt redemption situation.

To 2^nd query it has been observed that historically whenever market indices have given very high return in last 1 or 2 years there has been correction in following year. Higher the return more is the probability of short- term correction. Long term average return is somewhere between 12% to 14% p.a. Any huge swing or deviation from long term average corrects at same stage in short-term.

Some might be thinking Nifty is already above 17500 and may go to 19000 or 21000 or….. Yes, possibility is there but whatever level it goes (say 20000) probability of correction in short term will always be there.

The only thing is, should you wait to repent later or take calculated risk now? Choice is yours.