Rohit started investing in the stock market with his first salary. He was very excited about the concept of the power of compounding and read enough about the fact that “the earlier you start, the better it is.” So, he handpicked 10 stocks to invest in every month.
Initially, everything was going smoothly. Within 6 months, his equity portfolio was up by around 8%, which is much better than a fixed deposit or any other fixed income asset class. But the good time didn’t last long enough. Suddenly, news of a global trade war & some unfavourable domestic policies jittered the stock market, and within a few weeks, his unrealized profit entirely disappeared. That 8% overall profit quickly turned into a loss.
Rohit didn’t panic at all; he was well aware of market volatility and was convinced that sooner or later, patience would pay off, so he continued investing as per the actual plan. However, even after 6 months, the market didn’t recover. His losses widened further. Still, he didn’t give up but started losing confidence after prolonged underperformance. In hindsight, it looked like he started investing when the market was near its peak.
A year after Rohit’s initial investment, the stock market had bounced back a little but not recovered fully. His portfolio was around a 10% overall loss. Out of 10 portfolio stocks, 4 stocks were slightly positive (5%-10% return), 3 were at a loss of around 20%-30%, and the rest were at the cost price.
A few of his colleagues invested in gold and made 9% annual returns without any effort in stock selection & portfolio monitoring. Looking at this, Rohit started losing patience. He is now frustrated and tempted to apply the diversification concept in the portfolio. So he sold the four profitable stocks and invested that money into gold. He held on to the underperformers with a plan to sell at cost price.
Unfortunately, the next year was brutal for him. The stock market made a full recovery. Those four stocks he had sold went on to move up 50%-60% after his exit. The underperformers he didn’t sell were still down by 20-30% from the average purchase cost. Even worse, the gold price crashed by 5% from his investment. After two years of hard work and all the efforts, the overall portfolio was still in loss!
“Rohit’s experience isn’t an exception. Over the past 15 years, I have noticed many retail investors repeat the same mistakes: selling winners early, holding losers & rebalancing investments based on past return,” said Prasenjit Paul – equity analyst at Paul Asset and the fund manager of 129 Wealth Fund, a SEBI-registered Category III Alternative Investment Fund.
“Always remember, stocks showing strength in a weak market are the ones that most likely outperform in the next upcycle. So, selling profitable stocks in a weak market can turn out to be a costly mistake akin to “killing the golden goose”. Conversely, holding consistent underperformers over a prolonged period in the hope of price recovery often drags down the overall portfolio return,” Prasenjit Paul added.
Key lessons for investors:
Here’s what investors need to know, as per Prasenjit Paul about stock market lessons from Rohit’s journey: When not to sell
- Don’t sell or switch between asset classes solely based on recent past performance. Chasing the past outperformer often means selling near the bottom and buying near the top.
- Stocks that are resilient during a market correction are often the ones most likely to outperform in the next market upcycle. Don’t sell stocks that show strength during a subdued market.
- Selling is more important than buying. Locking in profits or losses at the wrong time can reverse the effort of disciplined investing.
Success in equity investment is less about finding the perfect stock and more about making rational buy or sell decisions, keeping emotions aside. Your reaction during the market volatility, primarily in deciding when to exit, determines whether your portfolio compounds wealth or erodes it.