Bear markets are common.
The average length of a bear market is 289 days or about 9.6 months. That's significantly shorter than the average length of a bull market, which is 991 days or 2.7 years.
Since 1992, the Indian stock market has gone through as many as 10 bear markets. With the exception of one, all the other 9 bear markets lasted for a year or more.
So if you make an investment and haven't waited for at least this amount of time, withdrawing may not be such a good idea.
At the end of this blog, we tell you how to 'crash-proof' your investments to stay unaffected by market volatility. I.e. how do you prepare your portfolio for market volatility when you near your investment goal? (Hint: SWPs)
Withdraw or reinvest?
Let's say you're seeing good returns, do you immediately withdraw?
When you withdraw your returns and dividends, you miss out on the power of compounding returns. Reinvesting almost doubles your portfolio value in a span of 10 years.
How to withdraw during retirement
When you start investing with a goal in mind, you start working towards that goal financially. Once you near your goal in corpus amount and date wise, it's a good idea to start withdrawing your funds for reasons mentioned ahead in this blog.
Once you reach your retirement corpus amount you can follow Bengen’s 4% rule to start withdrawing your funds for living a pleasant retired life.
A retiree can withdraw 4% from their investment portfolio each year and the amount adjusts annually for inflation.
If you have ₹1 crore saved for retirement, for example, you could spend ₹4 lacs in the first year of retirement following the 4% rule.
Beginning in year two of retirement, you adjust this amount by the rate of inflation. If inflation were 2%, for example, you could withdraw ₹4,08,000 (₹4,00,000 x 1.02).
In the rare case where prices went down by say 2%, you would withdraw less than the previous year—₹3,09,200 in our example (₹4,00,000 x 0.98). In year three, you’d take the prior year’s allowed withdrawal, and then adjust that amount for inflation.
3 times you SHOULD withdraw
Of course, there are times it makes complete sense to withdraw from your portfolio. These are the 3 instances.
1. You've achieved your goal
The perfect scenario. You were investing to buy a house and you've found the right one, or you're ready to retire or you've been investing for a car. In these cases, you're ready to withdraw, but make sure of these things before you do -
- Exit Load - Mutual Funds have a specific exit load that is charged (~1%), so make sure to include this in your calculation.
- Tax Implications - The two capital gains taxes are Short Term Capital Gains & Long Term Capital Gains Tax. LTCG on the sale of listed equity shares are taxable at the rate of 10% if the capital gain is more than Rs. 1 lakh in a financial year. A surcharge is also applicable on this LTCG that varies from 10% to 37%, depending on the investor's income.
- Volatility in the market - Exiting during the southward market results in negative returns. Be sure to stay ahead of this by withdrawing a few months in advance of the goal date.
2. Rebalancing your portfolio
As your investments move with market fluctuations, they can knock your portfolio off track and impact your goals.
That's why it's important to periodically rebalance your portfolio, which means moving your money from one part of your portfolio to another (e.g. from bonds to equity funds, or vice versa).
3. Emergencies
No, buying a really expensive phone doesn't count. An emergency is a situation that inhibits your goal regardless of whether you continue to invest.
For example, you're investing to buy a house. You fall into some legal dispute and need funds for fighting your case. Without the money, you could lose the legal dispute and based on the offence you might not ever be able to buy a house.
Of course, a medical situation trumps any other investment goal, and that's why you should be ready with life insurance with a good premium.
Why should you withdraw 'Systematically'?
What is a Systematic Withdrawal plan?
A Systematic Withdrawal Plan (SWP) allows an investor to withdraw an amount from their investments periodically.
Just as SIPs help you average your investment cost, SWPs help you average your withdrawal. This ensures that you don't sell out at the bottom.
The minimum amounts that one would have gotten at the time of redemption start to increase with an increase in the SWP period. However, your chances of getting high returns also start to diminish simultaneously, as seen from the maximum amounts. Hence, SWPs tend to moderate the extreme outcomes in both directions.
From analysis, it's evident that SWPs rather, are a method to not lose your accumulated corpus, especially in the event of a sudden crash. It's true that opting for SWPs can also lower your returns but again SWPs are not meant to boost your returns but protect what's already there.
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