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

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Your greatest edge

Posted by Muthu on October 15, 2016

Five decades ago, the average holding period of a stock in NYSE was 8 years. This means an investor held on to his investment for an average period of 8 years. The holding period now stands at around 4 months. Yes, an investor, on an average, holds a stock only for 4 months. In India, we don’t have any holding period data for stocks. But we do have data for equity mutual funds.

As per AMFI data, 25% of the equity investors hold the funds for a period of 6 months or less. 50% of investors do not hold for more than 2 years. The median holding period of investors is barely 18 months to 24 months. If average holding period for equity fund itself is only around 2 years, for direct stock, it should be much lesser.

From what Prashant Jain has mentioned last year, hardly 2% of the investors may be holding funds for 10 years or above.

We hope that better and detailed data is shared by stock exchanges and AMFI in the time to come.

The CRISL AMFI Equity fund index has never given a negative return for any 5 year period on a daily rolling basis since inception. So a bare minimum holding of 5 years would have ensured that there are no unpleasant shocks for investors. By holding for 6 months to 18 months, they are setting up themselves for disaster. By holding for a lesser period, not only they lose the benefit of long term compounding, but also get exposed to the negative effects of short term volatility.

Long time in the markets lead to excellent compounding. By holding for 10 years through few diversified equity funds, the probability of getting a decent return superior to other asset classes is high. Sentiment and liquidity decides the short term. It is earnings growth which decides the long term.

By holding for shorter period, we are clearly sending out a message that we are speculators. We would get the plus or minus of short term price movements. By holding for longer period, we are clearly conveying that we are investors who are looking for earnings growth. Over long run, earnings growth gets automatically reflected in prices in the right way.

Information, knowledge and analytical tools are available in plenty. In fact, we are all flooded with information all the time. There are thousands of professionals who keep close track of markets. It is unlikely that our knowledge would give us any edge in the market. Knowledge is no longer scarce but is in abundance and mostly free as well. What most people lack is the ability to stay the course with patience and discipline. A very small percentage of investors have the emotional maturity and right behavioural traits to hold on to their investments for long term. This gives them a superior edge in the market.

As individual investors focusing on your long term goals and wealth creation, you all have this edge. This is no small edge. It is your greatest edge. This is what separates a successful investor from a failed one.

A tiny portion of equity investors create good wealth. Rest all remain where they are despite being associated with capital markets. The key ingredient in successful investing is staying the course for long run through ups and downs. Once you narrow down on right investments then what matters most is your ability to hold on to them for a really long time.

Great fortunes are made by holding on to good companies and right funds for many years and decades.

Use your greatest edge.

5 Responses to “Your greatest edge”

  1. svp99 said

    Hi Muthukrishnan, Can you pls advice if I can top up my SIP investments with extra lump sum ? is it called churning the portfolio ? I am not changing the funds, I am not disturbing the SIP. Whatever extra saving I have I am pushing that in. is it okey ?

  2. Girish Sidana said

    I understand the benefits of remaining in the market for a long time and not get disturbed by the short term volatility. You have earlier talked of Dalbar studies and investor behaviour. Most investors loose money because of panic. In fact it is the highly liquid nature of equity investments that help investors withdraw at wrong timings. My question is “Why can’t an AMC create a MF product which locks your investment for a period of, let’s say 10 years or any other reasonably long term and then provide a guaranteed return?”

  3. svp99 said

    Hi Sir, could you please post more insights into lump sum investments into Mutual funds and STP, SWP as well ?

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