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Booking Gains

A much more appropriate way to say this – rebalance. But that doesn’t catch the eyeballs. So “Booking Gains” it is. At least the title!!!

So why rebalance, err, correction – book gains? I can think of following reasons:

-          Reducing risk, especially in case of catastrophic equity market fall. You have been investing in equity funds for real long time and have built sizeable “unrealized” gains. Some black swan event happens. Recall market behaviour during Covid era - down nearly 30% in one month!!!. It is given that good part of “unrealized gains” will be wiped off in case any other black swan event happens in future. It may come back quickly, or it may take a while to recover. You may start doubting the equity markets, or your investing acumen. Taking out some gains when things are going good will be of great help in taking in any severe market downturn stoically. Essentially, it will be much easier to say - “this too shall pass”!!!

    

-          You also increase your capital while going the contrarian way. When some bit of “unrealized gains” from equity investments are taken out and invested in low risk debt investments, gains become part of capital. Now you have more firepower in your purse

 

Next comes the process of booking gains. I would like to go about this way:

-          Decide upon allocation between equity and non equity part. If due to market gains, equity part moves up 5% above the decided allocation, I would “book gains” and deposit the proceeds in non equity funds

-          Say I have decided upon allocation of 75%. If my equity part goes above 80%, I will sell enough equity funds to bring back the allocation to 75%. Or maybe even 70% if I feel markets have run up quite a lot and to play it safe, I will reduce my equity allocation  a bit more

-          And now that gains have been taken out, these stay in non equity funds for at least a year. Off course, if markets correct quickly, and my equity part goes down by another 5% owing to the fall. I may hasten the deployment

Does this look like market timing? Maybe. Well, anything which increases my “staying power”  is welcome. I will go by that. But then each to their own!!!

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