The Principles of Investing:
For over two years now, the market has been range bound, oscillating between the 16,000 to 20,000 points range. Just when it looks like the shackles are lifting comes the turnaround and just as investors start fearing an imminent crash, the index manages a recovery and rebounds.
Consequently, most investors are in a dilemma and quite don’t know how to play out this situation. While some have preferred to wait out the volatility by staying out of the market, others are indulging in chasing returns by dabbling heavily in gold, silver and other commodities. Yet others are gung-ho on FMPs and fixed deposits where in some cases the returns on offer are in the region of 10% - 11% p.a.
However, the truth is there is no reason for investors to get antsy. While desiring a good return is fine, having a rational perspective is crucial. In an effort to earn 11% p.a., one could run the risk of losing 100% in no time! Chasing returns is always risky and its best to avoid greed. Towards, this end, let’s review some of the lessons that one learns along one’s journey as an investor. Some of these learnings emanate out of personal experience, some out of the experience of others and some is wisdom provided by those who have been fairly successful investors themselves.
First up - the market is like a class room where we are taught lessons. The same lesson is taught to you time and again till you learn it properly. Once you have finished your learning, you move on to the next class room where you are taught another lesson. Successful investors are those who learn the most lessons along their investing life.
And the very first lesson in this classroom is regarding the virtues of long-term investing. Actually, the term ‘long-term investing’ is nothing but an euphemism for the combination of the powerful twin forces of compound interest and time. Compound interest in solitude means little. And time without the company of compound interest is equally meaningless. However, most retail investors lack the patience, conviction, heart and stomach required in combining these two forces for any meaningful length of time.
So here’s what one can and should do. Investing all your money in any one type or class of instrument is always risky, no matter what the instrument is. Instead, consciously spread your investments regardless of the external environment. Amidst all the noise, do not let go of the basics. Keep it simple, keep it real. While investing in gold is indeed desirable, have no more than around 15-20% invested in the metal. Don’t buy physical gold, instead use Exchange Traded Funds (ETFs). Allocate another 20% to relatively safe bank fixed deposits or short-term income funds. Cash can command around 15%. The balance can and should be invested in equity, not in a lump sum but in a staggered manner through Systematic Investment Plans (SIPs or STPs). This way, you can let compound interest do its work in the company of time. If the market falls, you get the same stuff cheaper. If the market rises, since you are anyway participating, you make profits. Either way, you win. It is really as simple as that.
Don’t borrow to invest. Ever. Do not listen to tips that your neighbour, train friend or office colleague is so gung ho about. Even if you listen, do not act upon the tip. Instead keep it in mind and be sure to check after a year or so what actually did happen to the hot stock that everyone was so excited about. That is, if it is still traded. Invest with mutual funds with an established track record of at least five years. Choose plain vanilla diversified funds. Then hold fast, hold tight and hold out.
Of great relevance in the current situation is a quote from Warren Buffet. He has said – “Five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary (stock market) buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the economy, over a period of time, will do very well, and people who own a piece of it will do well. Just don't borrow money to buy your piece.”
While Mr. Buffet’s statement was to do with the US market, it can literally be copy-pasted for our market too. Over the next five-ten years, in spite of its politics and politicians, India (as compared to the West) will do well. Do participate in this prosperity. And the best way to do this is by staying invested over the long-term. Do not try and time the market. Despite all the upheavals and turmoil that we go through, at the end of the day, we are progressing. And this progress will manifest itself in the stock market one way or another. The timing is irrelevant, that it will happen is certain.
Or in other words, making your money make money is really so simple that it becomes difficult. However, if you try and actually apply the above principles, day in day out, month in month out and year in year out, the chances of losing are virtually nil. To benefit from these lessons is up to you. The question is --- are you up to it?
The writer is Director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at email@example.com
Source: Yahoo Finance India