WHEN TO NOT INVEST IN A LONG TERM INVESTMENT

Stock Market Crash

Written by Aryan Agarwal

September 15, 2020

Investing is hard, and you are bound to make mistakes that are common but avoidable just by learning and knowing about them.

Where to invest?

How to invest?

How long should you invest?

These are some of the basic questions that people have. So in this article, I will answer the “How long you should invest?”

70% of people would say to go for a long term investment. Just because it has so many benefits, your money will be safe, the risk will be low, and the list continues.

But, before investing in a long term plan, you must have to go thoroughly all the terms and conditions. Also, there are so many disadvantages, or you can say when to not invest in a long term goal. Some of which are: –

When You Don’t Have Patience

Patience is very crucial for investing.

It is not an option; it’s compulsory. If you are not patient, then go for short term investment.

But there are also other long term investments like index fund where you can put your money and don’t bother about it anymore and don’t need much patience.

If You Want Your Money Immediately

You can’t withdraw a part of your money before maturity from a long term plan.

It can be done in exceptional circumstances but not in all because regular withdrawal can make your returns less, and in the end, you won’t be satisfied.

When You Don’t Have Time

If you are so old and at the age of 50 and above, you want to invest in a long-term strategy, then it is a terrible idea for you because long-term investment and other factors need proper time. Long term plans are only for those who are young or have more time to wait till maturity.

When You Are Not Up For Making Extra Efforts

Daily life is stressful. You have to deal with laundry, cook your food, watch the kids, study for your exams, and work 12 hours a day. With all those chores, do you have time to manage your investment portfolio like a hawk?

So do not go for long-term plans when you cannot manage all these at once.

When You Don’t Know How To Research Analytically

When you are putting your earned money in a long-term investment, you must have to go through the company’s goals, strategies to cope with the financial crisis, growth strategy, etc. But besides these, you also have to go through the things which are not mentioned numerically. You have to use your intellectual skills to identify what is inherent behind these numerical figures.

And if you cannot do these things, then do not go for long-term investments.

All this is fine. But what if you already invested in a long term investment and now, due to some reasons like financial crisis, want to sell off your investment or stocks. Then is it possible? And if yes, then how?

Yes, it is.

First of all, what many people do is WAIT. They wait for their stock prices to come up at their original prices to sell at a price at which they bought the stock. They want to maintain their break-even point where

PROFIT = COST

This is where they put themselves into losses.

Whenever you are going through this situation, you have to be patient and play smartly.

When You Are In A Losing Trade

Most of the long term investors are born out of necessity instead of their own volition as when they lose money on a trade, they hold the position for long term so that they can break even on the trade.

When you invest money in some stock but end up losing money in that trade, you shouldn’t hold it for a long time just in the hopes of eventually breaking even on the investment.

Just because you make a loss doesn’t mean that you cant accept it and move on. Everybody makes mistakes including all the biggest investors in the world. They accept it and move on by booking a loss.

The key difference between them selling at a loss is that they sell their position at a loss only when the fundamentals of the company is changed. This is because they know that they can average out their position if they think the company is fundamentally sound.

When a company’s stock price falls down by 50% from your purchasing price, the company needs to double its stock price just for you to break even on your trade.

You need to reevaluate your decisions to hold your long term stocks that are at a loss, and you are just holding it for you to break even.

Instead, you should book a loss and invest that money elsewhere where a better opportunity awaits.

A stock that goes down by 50% has to increase by 100% to get back its value.

Let’s say you have a share of Rs.10, and it goes down by 50%, i.e., Rs.5, so now it is worth only Rs.5.

To overcome its value, it has to be increased by 100%, i.e., 100% of Rs.5, which equals to Rs.5. And hence now, it recovered its value at which it was initially purchased, i.e., Rs.10.

Another example, let’s say again, you have a share of Rs.10. Now it goes down by 10%. Then it has to be increased by 11% to regain its worth.

This is just simple mathematics, which many fail to do so because you think to get back the money you had initially invested at the time of crisis.

They think that if a stock has gone down by 25%, then it needs to uplift by 25% only. But this is not the case.

Recover Longterm Investment

At last, one point that you need to remember is that it is not a full-proof formula. It is a way to cut off some of your losses and manage to be efficient in the time of crisis.

Also, you should have an exit strategy which should be unique. This will significantly improve the odds that the investor will not end up holding worthless stocks at the end of the day.

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