“When’s the best time to invest? It’s today, not tomorrow” – Charles Schwab
Key takeaways:
- Focus on asset allocation. Equity should form major part of your financial portfolio.
- Invest systematically (SIP or STP route) in equity for long-term.
- Increase equity investments during market panic, don’t sell in panic.
- Have a long-term orientation. Don’t be disheartened by short-term poor return. Good things come to those who wait!
- Remain invested for long-term wealth creation. Periodically review your portfolio and rebalance if needed.
Last few days have been somewhat more volatile for the stock market. Equity market has declined. The fall in some stocks has been rather steep. As expected, we also got the news that inflow into mutual funds declined for the fourth straight month. No one can deny that the valuation of Indian stocks has been somewhat expensive. However, that is not why mutual fund flows have deteriorated. The flows have deteriorated because most people who entered the market with wrong expectation of making a quick return on their investments. They are somewhat disappointed with the return and are looking at the exit door.
Why investor return was 1/4th of the top performing mutual fund’s return?
Let me give an example of gap between investor return (what an average investor got from the mutual fund) and mutual fund return (what the mutual fund delivered). Peter Lynch has been hailed as one the best mutual fund manager of all times. During his tenure Lynch generated 29 percent annualized return. But Lynch himself pointed out the dismal return investor in his mutual funds got. He calculated that the average investor in his fund made only around 7 percent during the same period. The main reason was investor flocking to his fund after a good period and hitting the exit button at the slightest signal of trouble. So, average investor, who invested in one of the best performing mutual fund generated less than 1/4th of what the fund actually generated (Peter Lynch’s Track Record Revisited). This is consistent with findings of Dalbar study on investor return (Investor Returns Vs. Market Returns: The Failure Endures).
Now, we all know equity is a long-term asset. The beauty of equity return is that it is very lumpy. It means that there could be periods when equity return will be very low. Then there will be period when market suddenly rallies. To benefit from the upsurge in the market, one needs to keep investing during periods of low/negative return and remain invested.
How many investors have generated 15% return?
Return from fixed deposit is around 5 to 6% before taxes. The return from equity is much higher. Many people have invested in equity but how much have actually generated a return of around 15%. Very few!
Equity is volatile asset classes and returns from equities revert to long-term averages. So, periods with high return are followed by periods when returns are weak and vice versa. Just to illustrate this point, I have plotted the financial year return for NIFTY 50 Index. Between 2007 to 2013, the market remained flat. Invariably, such periods of low return are followed by periods of high return.
Who is to be blamed for poor investor returns from the best performing asset?
Simply – our behaviour. We study for 15 to 20 years, get college degrees and then only we find jobs that pay us well. Can we finish a college degree in a year? While we show immense patience in other fields of our life, our behaviour in financial markets is rather bizarre.
More people flock to equity market during good times. Furthermore, people want quick and consistent returns. However, once a sharp correction starts, inflow into equity mutual funds start to dry up. Most people see crisis in such an environment and hit the exit button. However, those who see opportunity and persist generate better returns. Don’t stop your SIPs during correction. If anything you want to do, invest more during times of market stress.
Finally, our behaviour decides what type of return we will generate from equity mutual funds. Sometimes, we can panic, behave irrationally and destroy our investments. For creating wealth:
- Focus on asset allocation. Equity should form major part of your financial portfolio.
- Invest systematically (SIP or STP route) in equity for long-term.
- Increase equity investments during market panic, don’t sell in panic.
- Have a long-term orientation. Don’t be disheartened by short-term poor return. Good things come to those who wait!
- Remain invested for long-term wealth creation. Periodically review your portfolio and rebalance if needed.
“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”– Warren Buffett
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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