Personal Finance 101
Asked on 19 Nov 2019
What's the thought process behind reinvesting?
Hi Jer Jian,
Taking profit is part and parcel of investing. So is cutting losses. Sometime you take profit off the table so that you take back a part of your capital. Once removed from the market, this sum of money is then released for re-deploying into other assets.
However, sometimes you might not find anything to re-invest into. This is where re-investing comes in, so for example where you may choose the re-invest option into the same Unit Trust, or take script dividends in the form of more shares of the company you currently have shares in.
My thought process behind re-investing is really about compounding the returns. Compound interest is the 8th wonder of the world; he who understands it gets paid, he who does not pays. But I prefer to withdraw my profits in cash first so that I can decide if I want to re-deploy to the same asset, or look elsewhere.
It depends on your style.
I find most people love to receive dividends, seeing cash flow helps reinforce the saving/investing habits.
Personally I prefer all the money STAYS in the investment account (hence I love IWDA ETF). Don't come out in dividends or selling some shares, please. I follow Warren Buffett, he never declare dividends and let them ride.... ;)
I am of the 'hold for a few decades' point of view, cause unless you're a really good trader - trying to time the market is probably a fool's errand.
That said, it must be stocks in companies that can last the decades.
I assume you are referring Stock Investment.
So the question I would ask myself is, what are the reasons I'm buying into the company, could the company continue to grow, and what is the company valuations.
If the company has a long runway to grow, and the valuations is still reasonable and not crazily overvalue, I would continue to hold the company.
Or if the company business moat is deteriorating, I would liquidate and invest in a better company.
In short, I would look at company fundamental, and its valuations.
The first thing to check when you have a gain is whether you have very high exposure to a particular asset class. If this is the case, you can take out some profits and use it to invest in some other asset class so that the portfolio can be rebalanced.
Secondly, you also need to check if you have another investment opportunity available. Just taking out the profits and storing it at home is not advisable. You can look for a new opportunity, analyse it well and deploy the profits into it.
I work at Kristal.AI, and it's my passion to evaluate various upcoming investment opportunities.
It depends on your existing portfolio and if you are overexposed to risk. If yes, then rebalance your portfolio by drawing out the additional investment return (total investment return minus expected rate of return). After drawing out this additional return, decide if you want to cash out or reinvest somewhere else.
To be honest it isn't important how you got there - basically you have a lump sum and can either
reinvest (into something else)
reinvest into the same thing as before (keep it riding)
So just think - which investment is better prospects right now, ignoring the history, and use that to guide.
From the gains in investment, you can do two things.
Let it stay and continue to give you more returns in the future
Or divest from it and look for other investments that can give you more returns.
Mr. Market’s job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You no not have to trade with him just because he constantly begs you to.