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It's wise to stay invested for long-term

Its wise to stay invested for long-term
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It's wise to stay invested for long-term

Highlights

Investors are advised to stay invested across cycles to make money. It's also better to make reallocation during different phases so as to gain more during the uptrend. Partly, this also makes average the cost, normalize the risk and generate higher returns

Equity investing is probably about being long, always. Perhaps what else is an option when you buy a business whose deliverables are of the future and though the decision to get in was partly due to the past performance, but the majority of the reasons being its prospects of the future and its abilities to meander through the maze. So, investing in equities tends to be 'long' (stay invested for long).

Once we accept this logic, it becomes easy for us to build expectations on our investment. Though, for any business the vagaries include much beyond their control like that of the government policies, regulations, macro-economic and political changes. What any business have control is to have a vision, to execute that vision and also the adaptiveness to accommodate that vision in the changing environment. These businesses not only just survive but thrive over periods of time.

So, while it's important for the investor to do right research in identifying a particular business and its stock, it's equally important for one to stay invested in these stocks. As I mentioned about the uncontrollable variables, they could at times act as an impediment or advantage to a business. This puts the businesses to undergo cycles like that of the economy. While at certain points of an economy naturally benefits business, there could other times, which could be difficult for a particular business. Hence, one has to get through these bad phases to make good returns in the long run.

On top of this, equity markets cycles like those of the business/economic cycles play out. This causes the overall good or bad mood translating to the bull or bear market respectively. And these cycles mayn't coincide with the earlier cycles I mentioned and so pose a gap in the value for the price being quoted. Based on the initial premise I've stated, equity markets are always forward looking. That's the reason one finds they extrapolate a situation and react accordingly. If a bad news strikes, markets respond with reducing their exposures leading to a fall as the market participants begin to extrapolate the negative data into their future.

Same is the case of good news, but as these assumptions get factored, things start to settle and rationality prevails, albeit slowly. That's why they say that no news is bad news as nothing lasts forever. This is where one has to remain consistent towards their investment objective and act accordingly. Peter Lynch, the famous fund manager once said that, "Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves." He was highlighting the perils of timing the market.

For instance, if one had the prior knowledge of the coming pandemic and the subsequent fall in the market, at best one would've shorted the market, but could any predict the complete reversal in such a short period. And if one were to have completely pulled out of the markets after or at such an enormous fall, was it possible for anyone to reenter in entirety to take advantage of the upward move. Hence, the answer remains in staying invested in the market, though a bit of realignment would be good for the portfolio. As Einstein famously quoted as "compound interest is the eighth wonder of the world. He, who understands it, earns it. He, who doesn't, pays it". All of us aspire for better things in life and so good returns out of our investments. And the first question we ask about any investment veers into rate of return but unfortunately when calculating the compound return earned, it's not the return (depicted as r) but the number of years (time period) which is placed at the exponential. That means higher returns alone mayn't end up with better outcome, but even smaller consistent returns for a long period of time helps.

Also, when timing the market, one is speculating about what the future event turns out to be and the future is unpredictable. It's said that in the short run the stock market is a slot machine, but in the long-run, the stock market is a weighing machine. It's ideal to stick to long-term investment and stay invested across cycles to make money. It's also advised to make reallocation during different phases so as to gain more during the uptrend. Partly this also makes average the cost, normalize the risk and generate higher returns.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at knk@wealocity.com)K Naresh Kumar

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