How Long Should You Hold a Stock?

Why Long Term Investments Are Good

Compounding does all the trick here! 

Staying put after investing in quality stocks will allow compounding to unleash its goodness. If you are invested in stock from lower levels and still find the risk-reward ratios favourable, adding more quantities on dips and averaging out your investments may be considered to reap better returns in the future. 

That said, selling stocks fearing loss or sudden price falls tends to hurt the portfolio. You might save some money in the short run, but you could be giving up on possible multi-bagger returns.  This can be reaped by holding shares for a long period. 

Let’s bring in some facts! 

Examples

Let’s talk about Nifty. Not long back, only a year and a half ago, during the early days of COVID-19, Nifty levels were dwindling and were a point of concern. In March 2020, the market hit circuit levels, and the Nifty tumbled to fresh lows of 7500 points. However, that was a turning point. 

Of course, a once-in-a-lifetime pandemic struck us and changed some things forever, but the course of the market has been unstoppable and resilient, to say the least. The Nifty recently breached the 18,000 mark- that is almost a whopping 250% return in 1.5 years! 

Those who held tight to Nifty even in its days of struggle in 2020 and those who showed patience and bought the dips made enormous profits.

Should We Hold a Loss-making Stock? 

Ideally, one should cut loss-making stocks and rebalance a portfolio once in a while, but that doesn’t translate into selling wildly and panicking from small corrections. The market has responded to staggering highs with small corrections several times.

When dealing with loss-making stocks, follow the following three rules to find out when to sell stocks yielding negative returns-

1. Sell the stock if the losses are beyond the risk-to-reward ratio you planned for that particular stock. 
2. Sell the stock if it falls below your stop loss or strong support zones. 
3. Don’t hold a stock for tax-loss harvesting because, in the quest of saving a few bucks in taxes, you’ll end up losing too much on the stock. 

What is the Ideal Holding Period? 

If you are not running short on funds, staying invested until your goals are realized may be the best way forward. Some investors advocate staying invested for years. 

Thus investing strategies vary for each individual and depend on their risk appetite. It should be aligned with investment goals rather than what others are saying.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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Research Analyst - Aakash Baid

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