Most investors start their investment journey to reap the benefits of investing. From meeting various financial goals to providing stability and emergency funding, the benefits of investing are myriad. However, the benefits of investing will accrue only if you stay invested. While this may sound like stating the obvious, it must be spelled out. Despite knowing this, many investors stop their investments at the first sign of volatility or as soon as markets start falling. Below, we will share two reasons why you should not stop investing and two reasons why you should exit your investments.
Two reasons why you should not stop investing
1. Achieving your financial goals – the primary reason for creating a financial plan and starting the investment journey is to achieve your various financial goals. The investments you make are largely dictated by the goal you want to achieve, the subsequent return requirement, your risk profile and your investment time horizon. If you stop your investment mid-way, then it is highly likely that you will not be able to achieve the financial goal for which you had created that investment.
2. Long-term growth – equity investments are primarily vehicles of long-term growth. In the short-term, equities can be highly volatile as stock prices can be influenced by noise and emotions. However, in the long-term, the volatility gets smoothened out and the true fundamental value of a stock emerges. Further, by staying invested for the long-term, you can also take advantage of the power of compounding. If you were to stop your equity investments at the first sign of volatility, it is unlikely that you would be able to reap its long-term benefits.
Two reasons why you should exit certain investments
1. Change in circumstances – the investment plan that you make should take into consideration your current income, risk profile, return requirements and investment time horizon. However, life does not remain static. There is possibility that a change in circumstances could warrant a change in your investment plan. For example, if you were to lose your job then it would impact your income flow as well as your risk profile. In such a scenario, it might be best to reduce your equity exposure.
2. Deviation from asset allocation strategy – A robust asset allocation strategy ensures that you are able to achieve the desired portfolio returns while ensuring that the overall risk of the portfolio is well contained. However, in order to stay tethered to your asset allocation strategy, it is important to periodically rebalance your portfolio, selling investments that are higher than the required allocation and buying investments that are lower than the required allocation.