personal finance

Can you handle your investments?


By Ashish Modani

Many mutual fund investors strongly believe that investing in some good star-rated funds through SIPs over a long period is all it takes to build a sizeable corpus. We often come across statements like: I want to invest Rs 10,000 per month over the next 25 years; I am an aggressive investor and I would like to create a corpus of Rs 1 crore?

Is wealth creation such a simple exercise? If so, we would have come across many successful investors. Why is it that such earnest beginnings doesn’t translate it into a lot of wealth? Well, as in relationships, it is easy to start, but extremely difficult to sustain it for a long period.

Many individuals erroneously assume that investment is all about numbers. Sadly, it is mostly a game of psychology.

Let me give you an example. You need to choose among the three securities:

A B C
Investment 25 25 25
Value 15 15 15
Notional -10 -10 -10
% loss -40% -40% -40%

It looks crazy, right? All three looks same. Does it matter which one choose when there is no difference between the choices? It is all the same, right?

Okay, let me change the context here:

A B C
Investment 25k 25 lacs 25 Cr
Value 15k 15 lacs 15 Cr
Notional -10k -10 lacs -10 Cr
% loss -40% -40% -40%

I am sure you won’t say they are all the same anymore. Most investors are likely to choose the first option.

All these options are still the same mathematically, the percentage loss is the same. So, why are we behaving differently?

Most investors won’t think of Rs 25,000 as a matter of life. They would still say the temporary loss doesn’t matter as they are long-term investors or aggressive investors. But when it comes to Rs 25 lakh and a loss of Rs 10 lakh, they would not be so nonchalant. It is a sizeable sum for many investors. Moving to the third option, the loss of Rs 10 crore is life savings for many individuals. They would get spooked even imagining a likely scenario.

What I am trying to say is that most investors start great and keep going smoothly until they actually face bad times. The going gets really tough from here. As their portfolio becomes bigger, they start making bigger mistakes.

As Nick Murray says, “Investments are simple but not easy to handle”

Most DIY (Do-It-Yourself or direct) investors fail to get the big picture of life. They do not know what Benjamin Graham said way back in 1929 in his very famous book called The Intelligent Investor is that “The Investor’s biggest enemy and worst problem is likely to be himself.”

It is their emotions or how they handle their emotions that is going to hurt them the most. Their tendency to seek comfort in the short term is going to be their biggest hurdle in wealth creation.

It is easy to say I am a long-term Investor when the going is great. However, the long-term chant fades away when the bear market comes calling. That is why there is a saying that only two types of investors make money: one who is dead, and another who has forgotten about his investment.

I have heard investors saying equity always gives good returns. “I invested Rs 5,000 and it is now more than Rs 2 lakh in 15 years.” Think of it: neither Rs 5,000 was a big amount when he invested nor Rs 2 lakh is going to make a substantial difference in his life today.

If you ask him whether he would have done the same thing with an investment of Rs 5 lakh that he could have converted to Rs 2 crore? You know the answer: he would have definitely taken the money out at the mere sight of a bear market that one see at least a few times in 15 years.

He could forget his investment only because of the small sum of Rs 5,000.

Mind you Sensex has tumbled by more than 50% three times during the last 30 years. There have been multiple periods (in 3-5-7 years) of low return, no return, and even negative returns.

How would you have managed?

Investment and sports have many similarities. You can be very good during a practice game, but it becomes very difficult to play naturally during the actual game because of the pressure. This because then it becomes a mind game. How you handle your nerves or emotions become crucial.

Napoleon’s definition of a military genius is “who can do average thing when everyone else around him is losing his mind.” The same rule applies to investments. During the journey of wealth creation, there will be many moments where the world seems to be coming part. The economy is faltering, businesses are failing, everyone is drowning, and the future looks very bleak. Can you do the average thing and stick to basics of investing in such a scenario?

(Ashish Modani is founder of SLA Financial Solutions, a Jaipur-based wealth management firm)





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