How long should you hold a stock?

How long should you hold a stock

In the game of cricket, you need to decide how fast or slow you are going to bat to chase the target.

The decision generally varies a lot depending on the format of the game.

If you are playing a 20 over the match, you need to bat aggressively, and when you are playing a test match, generally, you bat a bit slow.

Your game strategy depends upon the format of the game you are playing.

The game of investing is no different. Your investment plan should rely upon your investing format, whether you are a trader playing a 20 over a game or a long-term investor playing a test match.

There is also a midway in the game of cricket, which we call one day match.

The investors can also find themselves somewhere in between where they decide to hold stock keeping a long-term vision, and the same person trades some of his stocks on a short-term basis.

The core idea is that you should create an investment plan tailored to your financial goals.

Why are long-term investments good?

Now the 8th wonder of the world, compounding, comes into action when we talk about long-term investing in the stock market today.

The compounding process refers to the continued reinvestment of an asset’s earnings, be they from capital gains or interest, to produce additional earnings over time.

An everyday investor can double his money in 5 years if his stocks are generating a CAGR of 15%. Compounding works best in the long-term game of the stock market.

An investor needs to keep this concept of compounding whenever he is deciding which stocks to buy today in the stock market. Let’s take the example of Infosys.

Infosys’ share price in 1993 on its listing day was around 147 rupees per share now it is trading around 1800 level the share price has returned more than 1600% (adjusted to all bonuses, stock split, etc).

There are a lot of examples like this in the stock market.

When we see the condition of the stock market today, we can see that Portfolios tend to suffer from selling stocks for fear of loss or sudden price drops.

Short-term investing eliminates the chances of multi-bagger returns to the stock market today and in the upcoming period.

Knowing the potential of your stock

After knowing which stocks to buy today in the stock market and investing according to your investment plan, an investor should assess the stock deeply,

let’s say, after doing all the necessary research, you buy a stock from the stock market today. Within only a few days, its stock price drops drastically.

Now every reporter in the news and media is proclaiming that the business is terrible and has no future.

Now that you are investing in the stock market, you should be fully confident about your fundamental analysis of the company.

You should consider the fall irrelevant because the company still retains a strong financial base, and nothing has fundamentally changed within the company.

On the contrary, if the prices fall, you should buy more stocks to average down your portfolio.

This is only possible if you are sure about your stock assessment.

The stock market today is very competitive, so it is essential to be very clear about your investment plan for stock in the stock market today.

Knowing the potential of your stock will make it more straightforward for you about how long you should hold a stock in the stock market today.

Also Read: Stock Investment – When to Enter and Exit the Stock Market

The reasons to sell a stock 

Once a stock meets its profit requirement

it’s time to sell. When we make a decision about which stocks to buy today simultaneously, we should also decide the price target of that stock.

As soon as the price target range is reached, investors can start selling the position. Let’s take an example of an investor, a Rs 500 stock is purchased by the investor.

This is considered good practice for the people investing in the stock market. They intend to sell this stock if the price reaches Rs 1000.

This target price can be used to set a limit order to sell when the stock hits the target level.

Changes in the stock’s fundamentals

when you decide which stocks to buy today, you do a proper fundamental analysis of the company before buying that stock.

Not selling the stock because of a sudden fall in price is considered to be a good practice if you are investing in the stock market.

An analysis of a company’s financial statements is important for monitoring its fundamentals.

The investor should consider selling the stock if the company doesn’t perform as planned before the financial situation worsens.

In the stock market, there can be multiple reasons for that. The company’s products could become obsolete or uncompetitive due to technological advances, or company management resigns suddenly.

Opportunity cost

After deciding which stocks to buy today, the investor should not get rigid on that decision.

While investing in the stock market, you should always look for the next best opportunity for you.

An investor who hold stock on to an underperforming stock or is trailing the market in terms of performance may want to sell that stock and invest the funds somewhere else.

Historical performance

Let’s look at the history of the people investing in the stock market.

We can observe that Since most retail investors cannot make consistent and stable returns in the long run by following short-term trading philosophy based on technical indicators, it would be best to follow the example of legendary investors such as Buffett, Templeton, or Lynch.

All of them were successful long-term investors.

Make sure you choose investments that you understand and that you would still be comfortable with if the stock market closed tomorrow, and you were required to own them for 30 years.

You can benefit greatly from having this kind of mindset when deciding on investments.

In the event that your stocks plummet in price due to an economic downturn or any other negative event, you should only consider pulling your money out if you no longer believe in the company because its fundamentals have changed.

Conclusion

The thought process of any individual whenever he decides which stocks to buy today varies a lot, and to some extent, it is justified too.

When it comes to holding the horizon of any stock, this should be strictly based on one’s financial goals.

People investing in the stock market can’t make a profit all the time, so the question of when to sell a stock becomes crucial.

For passive investors who follow a long-term approach to investing, the stock market as a whole is likely to generate an annual return of about 7%-9% on average.

It’s impossible to predict how the market will perform in the future, however.

It is possible that the actual annual return that will apply to you will be higher or lower than anticipated.

Now, this return can become shorter if your investment horizon is shorter.

Historically, the stock market has gone up in the long run, and that it’s almost certain that if you stay invested for a few decades, you’re going to make a profit.

An investor should keep track of the stock; particularly, he needs to monitor if the fundamentals of the company have changed or not.

The investor investing in the stock market identifies his nature, whether he is a trader or a long-term investor.

Each individual’s investment strategies differ according to their risk appetite and financial goals.

The investor should not focus more on what other people are saying or what is news in the market about his stock.

He should stick to the fundamentals of the company and further decide whether to hold stock or not.

For a normal investor who is not an expert in the stock market, long-term investing is a proven success formula.

Further Reading: 

moneycontrol.com

Team R Wealth

Team R Wealth

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