While libraries around the world are full of topics that tell investors what to do when making portfolio decisions – I think “what not to do” is just as important – because it It’s your “No” call that ultimately defines your journey as an investor. This is often the difference between a peaceful investment journey and one marked by difficult times.
Most new investors had a good ride until about 6 months ago – that is when the “tide of cash” started to dry up, there are signs of fatigue coming on. infiltrate. The good news that brought them to the markets was the revival of the economy after the challenge posed by COVID. Today’s news, however, is replete with global inflation fears, with the United States and the Eurozone hitting inflation numbers not seen in the past 30 years. Added to this we have the war in Ukraine which is further stifling energy supplies. Wheat and commodities like palladium etc and Chinese lockdown further aggravating the strangled supply line situation.
The above set of news is sure to rattle any seasoned investor, but the question is, should this get them moving on their portfolios?
In a study done in the United States in 1984 by Fidelity Investments on top performing client accounts, what they found was very interesting and hilarious. The best performing accounts were those where investors forgot they had those accounts. I’m sure if the same study were done today, the results wouldn’t be much different.
Much of the above stems from a few behavioral aspects of most investors, which I will ask under a few questions:
Sophistry of the question – Market ka kya lagta hai? Investors are too focused on market levels. They forget that markets are actually made up of companies. There has been a lot of volatility, crises, wars, and they will be there in the future too. Always in the long term, markets will go up because companies, good ones, tend to improve over time. If one were to look at the Sensex from 1979 at 100 points (Sensex was officially launched in 1986 with the base value of 100 from 1979), today the Sensex itself has increased by approx. . 600 times. And I can assure you that no one has gone full circle. Yes, we have had and will have volatility in between – sometimes, which is excruciatingly painful, but if all of these investors were to view these corrections as opportunities to increase investments, rather than exit the markets, the return of investors would be much higher – this is where investor behavior comes in. Over time, most fund managers can manage the volatility of investments, but it’s investor behavior that is losing return on investment to the investor.
Avoid trying to time the markets: Invest every month. With interest rates rising we are all in uncharted territory, this may be a difficult time that many new investors will face. The only message is “Don’t try to time the market” – nobody can. As Peter Lynch so aptly put it: “More money has been lost trying to time the markets than due to market corrections”. It’s a good tenant we see in the mutual fund space – Over the past 4-5 years, whether it’s a lack of other avenues or because of investor education, the sustained push on SIPs has created a prize pool of Rs 12,000 crore per month. The main message here is – Stay the course. Build a portfolio for the long term.
Don’t listen to social media or any opinion floating freely on Twitter or any other social media. If it’s floating there, there’s someone expressing their opinion who may not have your appetite for risk or worse maybe they’re “not qualified” to give an opinion . Communicate with your portfolio managers and advisors.
Invest, don’t speculate: Ignore the urge to act on your wallets. Oftentimes, investors are looking to see the action on the portfolios – the action is sometimes confused with the work that has been done by the advisor on the portfolio. The same goes for the very companies in your portfolio. The longer you own businesses, the better most businesses will fare over time.
Don’t put all your eggs in one basket: Diversification across asset classes will help normalize your returns – It is very important to diversify into asset classes that have little correlation. If all your asset classes are doing well or badly at the same time, your portfolio is not diversified. Everyone says they have diversified but very few do. Many investors think of diversification in the same way as bonds and stocks, forgetting about precious metals.
Few other important things on the TO DO LIST of investors –
* Greed and fear: The easiest thing to mention is another of Buffet’s quotes. “Sell out of greed and buy when there is blood”. But this is the most difficult to implement. This is where the maximum losses occur when people try to time the markets. For instance. – What is the definition of a stock that is down 90%? A stock that attracts investors when it is down 80% and then falls another 50% from your purchase price. These types of potential challenges can only be overcome by investing regularly.
* Practice delayed gratification: By practicing delayed gratification, you will have more money at your disposal that you can use to invest. Teach your children about delayed gratification at an early stage. Studies suggest that time spent in the markets determines your returns. The more time you spend, the greater your returns.
* Index investing is a very good tool: Don’t underestimate the power of low-cost index investing. A wiser thing to do is to invest in a low cost index fund if you are not able to beat the index.
* Safety margin: Always look for the best value for money. Whether it’s shopping at discount prices for your clothes, buying a house and the same goes for stocks. This has proven true throughout history and will continue to do so in the future. Unless you buy something worth Rs 100 to Rs 30, you will not earn money.
* When investing, what should your goal be? Although the goals of individual investors differ, but for a long-term investor, the future income from your assets (dividends) should exceed your monthly household expenses. It will surely take time. Be frugal in your spending and invest wisely and regularly. All the smartest investors have done it.
* The most important point: discipline. Discipline is the key to your investment success. Avoid leverage. Think long term. Buffett is 93 years old, and he always thinks long term, none of us have the right to think short term as an investor.
* Lately – Building wealth is a long-term process – the more patient you are, the more joyful and stress-free it will be.
(By Siddhartha Bhaiya, Director and Fund Manager at Aequitas Investment Consultancy Private Limited)