The story in a nutshell: On March 13, 2020, I invested a substantial amount in an open-ended fund that invested in equities across the world. I sold end August.
Not impressive from someone who swears that she is a long-term investor. But hear me out.
My investment was based on two solid principles.
Long term. I was investing in an equity fund so was in for the long haul; around 8 years at the minimum. I was also comfortable with the knowledge that the value of my investment could sink much further. After all, volatility comes with the turf when it comes to this asset class.
Geographical diversification. Very often investors have a home-country bias and miss out on opportunities across the globe. I was deliberately investing outside India and looked for options not restricted to any specific geography or theme (European, Emerging Markets, Frontier Markets, U.S.).
PGIM India Global Equity Opportunities Fund fit the bill. It was a fund-of-fund, or FoF, that invested the money in an underlying portfolio managed by asset managers abroad. The fund fed into the portfolio of PGIM Jennison Global Equity Opportunities Fund.
Towards the end of August, I checked my portfolio. And to my absolute surprise, the amount I invested returned an eye-popping 72%. Let me reiterate; I invested in mid-March. The absolute return of 72% was for a period of less than 6 months.
If this was such a great investment, why did I not hold on?
I asked myself that question, as my investment horizon was for 8 years.
I would not sell an equity investment if the market tanked. I would refrain from converting a paper loss into an actual one. But it would be foolhardy to not convert a phenomenal profit into an actual one.
March 2020 saw one of the most dramatic stock market crashes in history. I did have the cash to invest and decided to put in the money during the proverbial and ghastly “blood in the street” market. Never in my wildest dreams did I envisage a stupendous market rally. I was at the receiving end of good old-fashioned dumb luck. So would it not make sense to pull my winnings off the table? What are the chances of this ever happening again?
Whether or not a judgment is worthwhile cannot be known with certainty when making the call. There was no way I could predict whether the market would rise much more (which meant I would lose out), or it would start tumbling (which would put me in a sweet spot).
But the ingredients for good judgment can be defined. So I decided to ask myself a few questions to figure out if my decision had the virtue of reasoned logic, and whether or not I was skipping over some of the nuanced reasoning.
- Has my goal changed? No. I was saving for my retirement kitty.
- Has my strategy changed? No. I am an ardent believer of global diversification.
- Was there a fundamental change in the investment? No. There was no change in the fund managers, their strategy, or the ownership of the asset management company.
- Where would I put the proceeds? Clueless.
- Would selling move me closer to my long-term goal? A resounding yes.
The first 4 answers pointed to the fact that I should stay invested. It was the last one that clinched the deal for me.
Here is what I learnt.
A long-term mindset is not necessarily a fixed number of years.
I was extremely comfortable with a wait that spanned years. But that does not mean I must force myself to stay on just to complete the predetermined time. Long term is more of a mindset than a number written in stone.
If I had bought a stock that was extremely undervalued, and the market recognised its value and sent its price skyrocketing, would I not exit at a very stretched valuation and book a hefty profit? In the same vein, if the return exceeded my wildest expectation, should I not convert that paper profit into something real?
Be tax aware
It has often been rightly advised that your decision to sell should not be driven by taxes. Don’t be tax driven, be tax aware. Be mindful of the tax implications of selling.
I would be charged short-term capital gains. A FoF is treated as a non-equity fund. So it will be taxed as a debt fund. Since it is STCG, the gain will be added to my taxable income and taxed as per my income tax slab.
If the return was less, the tax impact might have tilted the scales towards staying invested.
It is not so much the time spent in the market, but rather the point in the business cycle.
Frankly, I am a bit pessimistic about the near future. I do not believe the lockdown caused by the pandemic will leave any economy unscathed. Though the depth of the contraction will be more severe in some, every economy has witnessed a decline in economic activity across numerous sectors and industries. So the chances of making such a stupendous return in the near future seemed bleak.
But I was not running amok in fear. I have not sold any other investment. I just felt this was too good an opportunity to pass up.
My options were:
- Sell the entire investment.
- Leave the investment as it is.
- Sell in stages. If the market goes up, continue to sell at a higher rate. If it dips, I anyway booked some profit.
- Check the asset allocation and sell based on how much of my equity portfolio should be in global stocks.
In retrospect, it would have been logical to consider the last option. I just went with the one I felt most comfortable with, and the most convenient, though not necessarily the best.
Such good fortune probably comes just once in a lifetime. I am glad it happened in an otherwise bleak 2020.
Investment Involves Risk of Loss.