Be invested long for better returns
The other day my friend has just made a new milestone in life He published his first book, he is a tad over 30 and I know hes brimming with many in head, maybe he would end up writing at least 10 in before he turns 60 So, after the launch over the dinner, his mom asked him to stay in the present to not just enjoy but relist the success But he seemed to be restless and planning to think of what
The other day my friend has just made a new milestone in life. He published his first book, he is a tad over 30 and I know he’s brimming with many in head, maybe he would end up writing at least 10 in before he turns 60. So, after the launch over the dinner, his mom asked him to stay in the present to not just enjoy but relist the success. But he seemed to be restless and planning to think of what next?
As the discussion veered on, I paralleled life to a marathon and not a 100-meter dash. I suggested to not to stress at the next sprint but just continue to manage the speed to cover the next milestone. He replied that he would rather like a 42 one-km dash than one long 42km marathon.
This is exactly how most of us approach investing. We are eager to make quick riches in short periods of time and more so multiple times in our lifetimes. We like to hear stories of multi-baggers in three to 5-year horizon than a wait of decades.
Remember the study a few years back by Fidelity found that the best of the returns by the investors are those who have not touched their portfolios and one common thread among them is they are dead or those investors who practically didn’t check their accounts as they forgot the login credentials. Each time we talk about compounding effect, described by Einstein as the eighth wonder, our focus almost tracks to the percentage of returns, but it should ideally be on the number of years.
Compounding actually talks about the time value of the money and not the compounded corpus at the end. For instance, an investor doing a systematic investment of Rs 10K per month for ten years assumed at 10 per cent annualised return would end with a corpus of over Rs 20 lakh. And if the same investor were to manage to generate double the return in the same time period for the same contribution wouldn’t actually double the amount. The end corpus is about Rs 34.4 lakh only.
Now let’s consider if the same investor were to invest ten thousand a month for a period of 20 years (double the initial time period) at same assumed return of 10 per cent then the corpus at the end is Rs 72.4 lakh. Even if the investor were to invest for 50 per cent more time i.e., 15 years, the corpus would almost double than the 10-year period at Rs 40.2 lakh. So, research throws the importance of time spent in the market than timing the market. No, I’m not talking about discouraging investors to enjoy the money in their lifetimes but bringing a perspective to have long-term horizon in investing.
And moreover, the difficulty if not the impossibility is of timing the market right. The efforts would be tremendous and not fruitful always. Whereas adhering to a simple investment technique and utilising the natural tailwinds these would accrue crucial to making money in the markets. While investing in stock markets, two most important variables are price and profits. In an ideal scenario, companies are designed to generate profits, the very reason of their existence.
This is achieved by increasing the market share of their product or services, introducing newer products or services and/or increasing their market as a whole. Profits are an outcome of their efficiencies and productivities. Assuming the company is well managed, the profits accumulate and cumulate bringing in more profits. Identifying such company or stock is possible through various procedures and is dependent upon us, the investors.
Price is a reflection of how the investor values a particular company. It just projects the demand supply statistic of that particular stock in the market. This may not show the actual value of the company but certainly is what most of the investors view or bet on the company. This though, important is not in our control at all. Instead of trying to beat the market by complicating the approach, we could participate in the market with discipline to generate superior returns.
(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at firstname.lastname@example.org)