Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Equity and behaviour

Posted by Muthu on August 15, 2015

Happy Independence Day.

On this great day, firm up your resolve to achieve financial independence as early as possible. Financial independence would make life more beautiful and meaningful.

We’ve written many times in the past as to how your behaviour and only your behaviour shape your investment success.

I want to keep touching this topic once in a while so that we don’t forget the importance of the same.

Not chasing the fads in bull market and not falling prey to fear in the bear market is the key.

We’ve seen data (both India and USA) in the past that around 70% of all years markets go up and 30% it goes down.

I also read somewhere that in the long stock market history of US, the market keeps going up on 70% of the trading days.

But the sharp fall we see in 30% of the days or years are sufficient to scare us. When you see your portfolio dropping by 25% or 30%, it is absolutely fine to feel the fear. Bear markets are very nauseating. The key is not to act on the fear. ‘Do nothing and stay the course’ is the mantra you need to remember in bear markets.

You may wonder why I’m talking about bear markets now. The general opinion is that this bull market is going to last for at least some more years. Please note that even bull markets can have sharp corrections and falls. It’s good to keep reminding ourselves of the same.

Equity investing is a matter of faith, a faith in the better future of the country and hence it’s companies. If you’re not optimistic about the future of the country, equity investment is not for you. Then comes discipline; discipline of investing fixed sum every month over your working life, irrespective of ups and downs of the market. Then comes patience; of staying the course in the bear markets.

Unless otherwise stated, when we say equity investing, it always refers to the portfolio of stocks; diversified equity funds (non sectoral, non thematic). For any goals over 10 years and for simply creating wealth; equity is the way. Equity investments need to be looked in terms of decades and multi-generations. Never get into any equity investment for a period less than 10 years. Equity would beat all the other asset classes over long run and keep increasing your purchase power and wealth.

By opting for the discipline of systematic investing, you automatically buy more during down times and buy less during euphoria. This makes your purchase cost less than average cost thus paying way for above average returns. But for this discipline, we would end buying more in bull markets and not buying / selling in bear markets. A sure recipe for destroying wealth.

In India, whose future look extremely bright, equity is the best way to participate and benefit from the growth. Everyone would agree to this in a bull market. The problem starts when we see a 20% or 30% fall. Usually falls are accompanied by bad news or negative news is amplified by media to make investors scary. The best thing to do is to ignore the news and stay the course. This is the most difficult thing to do. We would hand hold you to stay the course in such times, as we did in the last bear market.

Bull market presents different set of problems. If small cap delivers outsized returns in a year, every one creates a portfolio of small cap funds. If there is an e-commerce sector fund tomorrow which delivers mind boggling returns, every one may want to put their entire net worth in the same! Not chasing fads, not falling to euphoria and sticking with the chosen portfolio is the discipline required in the bull market. In bull markets everyone would do well; some may do extremely well. What is important is how the survival and performance is over many bull and bear cycles; over many decades.

If greed and fear can be kept under check in bull and bear market respectively, you would build good wealth over long run. You would be among a small percentage of successful investors. Please note that it is normal to feel greed in a bull market and fear in a bear market. Even I feel the same. The key is not to act on the greed and fear. Over last few years, I’m fairly successful in this and that’s why I’m able to help you as well. If the financial advisor acts on impulses; how he can help his clients?! At the cost of repetition I would like to say that impulses of greed and fear are normal. Our success in investing comes by not acting on the same.

We want all of you to achieve financial independence. Also build great amount of wealth over next few decades, enjoy life, and leave a rich financial legacy for coming generations as well.

One Response to “Equity and behaviour”

  1. Siddhartha said

    Happy Independence Day!
    Once again a well written blog.
    Thanks for reminding us again that only our behavior can shape our investment success.

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