Time to cash out?

Though the stock markets continue to be volatile, they have recovered from the lows touched in March this year. The markets have posted a growth of around 93% (as on August 26, 2009) since March 8, 2009. Expectedly, many investors who have lost a huge chunk of their invested corpus in the stock market crash last year are now eager to recover whatever they can. Now the question is - is it the right time for you to cash out? While you would promptly say YES, we have a contrarian view on this.

Sensex: Rise of the fallen

Broadly, there could be two reasons for making investments. First, and the most ideal reason, is to invest for the purpose of meeting one or more of your future goals/objectives. Second, and unfortunately the most commonly practiced, is to make "quick bucks" by participating in market movements. The latter option amounts to timing the markets, something that many investors try to do, but rarely succeed. In our view, redeeming investments should not be a function of market movements, but rather a result of the following:

1. Redeem if you are sure that the fund in question has failed to meet its purpose in your financial plan. The reasons behind this could include poor performance or change in investment mandate of the fund, which makes it a misfit in your portfolio.
2. Redeem if you have to rebalance your asset allocation. Also,before you cash out, make sure that you have decided where to reinvest the redemtpion proceeds.
3. Redeem when you have achieved your investment objective.