Personal Finance Solutions for India

How long should you hold your share market investments?


Defined Tag: Stock Market.

There are as many answers to this question as there are strategies. But understanding which kind of stock price changes would unfold over your chosen period (and which you can capture), can help you in making your choice.

In any series of values arranged over time, there are four factors playing themselves out- long-term or secular trends, cyclical movements, seasonal fluctuations, and irregular ups and downs. The same story applies to stock prices over time. It is for you, the informed investor, to decide which ones among these you would plan to benefit from and devise your strategy accordingly.

Let us consider various time horizons more closely.

It is obvious that every stock investment has attached transaction costs. Unless you can earn more than these transaction costs of buying and selling- brokerages, demat costs, etc.- you are never in the positive.

Many people do daily trading- buying and selling within the day to realise gains without investments. It is high risk in the sense you are betting on movements within a single day. If for some reason your bet goes wrong, you have to cut losses and pay up. Unless substantial risks are taken, the size of your gains will be restricted since you have to restrict the size of your loss. Use of stop-loss techniques can help to an extent. However, the major gainers in daily trading will always be the brokers.

The next group of people trade with short time periods in mind. Although somewhat less risky than daily trading, your bet is limited by short time periods. Choice of scrips, mostly based on trading momentum, and stop-loss mechanism would be the key to any profits from such adventures.

There is another group who invest for medium term, thereby committing their money for 6 months and above. These people would certainly look for better quality anchors in picking their scrips considering upcoming corporate events and their expected impact on share prices.

Real pros bet for long run, for periods above 1 year, typically. They must have a good level of confidence in the company they are buying into. Downside risks over the longer period must be evaluated and upside potential must be carefully considered, since returns from these investments cannot ignore lost opportunities, even if in a bank deposit.

It would therefore mean that there are as many options as you would prefer. But it is essential to be clear on how long you will hold your investments and whether you have all that it takes to make a success of the specific game plan you have chosen.

It is unrealistic to expect a big fortune would be possible if your time horizon were not long enough. Because it would mean you need to serially succeed in a large number of bets and you will also need to apply more of your time to these investments. It is important to realise that with short term strategies you need to be both in and out of market at the right times on a larger number of transactions for the same period.

Long run plays require more intense efforts on your research prior to entering the trade. But once some decision is taken, only periodical reviews need to be undertaken.

It would be suicidal if you start for a day and end up remaining invested for a few days. Similar would be if you convert yourself from a short-term player to a medium term player. Because the rules of play are all different and nobody can expect to be good at different types of games.

There are no conflicts between various time horizons. Only that the rules of play would be different and so would be the quality of your price gains.