When should you pull out of equity investments?

Clifford invests in stocks and equity funds but wants to exit now because markets are at a high. He burnt his fingers when the markets crashed during the last business down-cycle, and he does not want to repeat his mistake. While those around him are investing in stocks, Clifford is convinced that there is no point in following the crowd. He thinks it will be good to cash out when others are still buying. Is Clifford’s decision to quit right?

Clifford is among those investors who think that timing is the key to making money in the equity markets. When he invested three years ago, there was a lot of optimism about the equity markets and it looked like nothing could go wrong. But, no one can say with certainty when the market will peak. We know what the peak was only after the market crashes. By then, it is too late to quit.

Since it is not easy to time his entry and exit right, Clifford should make things simpler for himself. Whether he remains invested or quits should be dependent on his financial goals. If he has long-term goals, which need protection from rising inflation, he should remain invested in equities for the capital appreciation they provide. However, though the returns from equities are high, they are not achieved year after year. By quitting now, Clifford could miss out an upturn. Only by staying invested for the long term can he hope to gain from the full potential of equities.


To quit or to stay invested will also depend on whether Clifford needs to earn a higher average return for his goals. By staying invested through rising and falling markets, he can achieve the average return. Clifford should quit only if he has decided that equity markets are not for him. In which case, he will have to invest more to achieve the same targets, as his returns are likely to be lower. If he chooses to quit now, only to come back again after the markets have risen further, his overall returns may not be very high.

Investors like Clifford should invest a proportion of their savings consistently.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.