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How Time Beats Volatility in the Stock Market

How Time Beats Volatility in the Stock Market

Investing in the stock market is often perceived as a roller-coaster ride of unpredictable highs and lows. However, time has proven to be a powerful ally in mitigating the effects of market volatility. In this article, we’ll delve into how time beats volatility in the stock market, why long-term investing is a winning strategy, and how you can leverage time to sustain wealth.

Understanding Market Volatility

Market volatility refers to the rapid and unpredictable fluctuations in stock prices. While it can be daunting for short-term traders, long-term investors can use volatility to their advantage. Instead of reacting to market dips and peaks, seasoned investors adopt a long-term perspective, allowing them to ride out market cycles and reap significant returns.

Key Takeaway: Volatility is a natural part of the stock market. It is not something to fear but rather a phenomenon to understand and manage effectively.

The Power of Time in Investing

Time is the most critical factor in mitigating volatility. Here’s how:

1. Compounding Effect: The longer you stay invested, the more time your investments have to grow through compounding. Compounding generates returns on both your initial investment and the accumulated returns, creating exponential growth over time.

Example: If you invest ₹1,00,000 at an annual return of 10%, your investment will grow to approximately ₹2,59,000 in 10 years and over ₹6,72,000 in 20 years. The longer you remain invested, the greater the impact of compounding.

2. Market Cycles Even Out: Over the short term, the stock market can be highly volatile, reacting to economic news, geopolitical events, and investor sentiment. However, over the long term, these fluctuations tend to average out.

Historical data shows that despite periodic crashes, the market has always trended upwards in the long run. For instance, the BSE Sensex, which was around 100 points in 1979, crossed 66,000 points in 2023.

3. Cost Averaging: Regular investments through methods like SIP (Systematic Investment Plan) allow investors to average the cost of their investments. When the market is down, you buy more units; when the market is up, you buy fewer units. This strategy reduces the impact of short-term volatility.

Why Short-Term Trading is Risky

Short-term trading involves buying and selling stocks based on market movements. While some traders may make quick profits, the majority end up losing money due to:

  • Emotional Decision-Making: Fear and greed often drive short-term traders, leading to irrational decisions.
  • Transaction Costs: Frequent buying and selling can rack up significant brokerage fees and taxes, reducing overall returns.
  • Market Timing Risks: Predicting market movements accurately is nearly impossible, even for experienced investors.

Case Study: The 2008 Financial Crisis

The 2008 financial crisis is a prime example of how long-term investing can outlast short-term volatility. During the crisis, the stock market plummeted by nearly 50%, and investors who panicked and sold off their assets incurred massive losses.

However, those who remained invested and continued to contribute to their portfolios saw their investments recover and grow significantly over the next decade. By 2021, the market had not only recovered but also reached record highs.

Lesson: Staying invested during volatile periods can yield substantial long-term gains.

Strategies to Leverage Time in the Stock Market

 

  1. Start Early: The earlier you start investing, the more time your investments have to compound. Even small investments can grow significantly over 15-20 years.
  2. Diversify Your Portfolio: A well-diversified portfolio reduces risk and smoothens returns over time. Include a mix of large-cap, mid-cap, and small-cap stocks, along with bonds and mutual funds.
  3. Invest Consistently: Regular investments, such as monthly SIP, help in rupee cost averaging and mitigate the impact of short-term volatility.
  4. Focus on Quality Stocks: Invest in fundamentally strong companies with a history of consistent earnings, robust management, and sustainable growth.
  5. Stay Disciplined: Avoid reacting to short-term market noise. Stick to your investment plan and review your portfolio periodically, but avoid impulsive decisions based on market fluctuations.

How to Stay Calm During Volatile Markets

  • Stay Informed but Not Obsessed: Keep track of market news but avoid checking your portfolio daily.
  • Revisit Your Financial Goals: Remind yourself why you started investing — long-term wealth creation, retirement planning, or financial independence.
  • Seek Professional Guidance: Consult a financial advisor to help you maintain a steady investment strategy during market turmoil.

Conclusion

Time is the ultimate weapon against market volatility. While short-term market movements may be unpredictable, the long-term trend of the stock market has historically been upward. By focusing on compounding, cost averaging, and disciplined investing, you can navigate market volatility with confidence and build wealth sustainably.

Are you ready to harness the power of time to beat volatility and achieve your financial goals? Start investing today and let time work its magic.

Frequently Asked Questions

  1. How does time help in reducing the impact of stock market volatility?

Time allows investments to recover from short-term market fluctuations. Over the long term, the stock market has historically trended upward, averaging out periods of volatility and generating positive returns.

  1. What is compounding, and how does it work in long-term investing?

Compounding is the process where your investment earns returns, and those returns generate additional returns over time. The longer you stay invested, the more powerful the compounding effect becomes.

  1. Can short-term trading beat the market?

Short-term trading is risky and requires precise market timing, which is extremely difficult. Long-term investing is more likely to yield consistent returns by mitigating short-term volatility and leveraging compounding.

  1. What is rupee cost averaging, and how does it help in volatile markets?

Rupee cost averaging involves investing a fixed amount at regular intervals. During market dips, you buy more units; during market highs, you buy fewer units. This strategy helps in averaging out the cost of investments over time.

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Saving vs. Investing: What’s the Difference and Why It Matters

When it comes to managing your money, you’ve probably heard a lot about saving and investing. But what exactly do these terms mean, and why are they so important for your financial future? Let’s break it down in simple terms.

What is saving?

Saving is the process of setting aside money for future use. It involves putting money in a safe place where it’s easily accessible, like a savings account or a fixed deposit. This money is usually kept for emergencies, short-term goals, or planned future expenses.

How do you save?

Saving involves regularly depositing a portion of your income into a savings account or other low-risk financial instruments. Automating these transfers can help make saving a consistent habit. Many banks and financial institutions offer automatic transfer services where a predetermined amount of money is moved from your checking account to your savings account at regular intervals.

Why should you save?

Saving ensures you have funds available for emergencies, planned expenses, or short-term goals. It provides financial security and peace of mind, knowing that you have money set aside for unexpected events or specific future needs.

Benefits of saving:

1. Financial Safety Net: Having savings provides a cushion for emergencies. If unexpected expenses arise, such as medical bills or car repairs, your savings can cover these costs without disrupting your regular budget.

 

2. Liquidity: Savings accounts ensure that you have easy access to your money whenever you need it. This liquidity is crucial for handling short-term financial needs and emergencies.

 

3. Low Risk: Savings accounts are generally safe and stable. Your money is secure, and there is little to no risk of losing it.

Drawbacks of saving:

1. Lower Returns: Savings accounts typically offer lower interest rates compared to investments. While your money is safe, it doesn’t grow as quickly as it could in higher-risk investments.        

            

2. Inflation Risk: Over time, inflation can erode the purchasing power of your savings. If the interest earned on your savings doesn’t keep up with inflation, the real value of your money decreases.

What is investing?

Investing involves putting your money into assets like stocks, bonds, mutual funds, or real estate to grow your wealth over time. Unlike saving, investing carries a certain level of risk, but it also offers the potential for higher returns.

How do you invest?

Investing requires researching different investment options, diversifying your portfolio to manage risk, and regularly contributing to your investments.

 

Here’s a step-by-step guide on how to start investing:

 

1. Set Clear Goals: Determine what you want to achieve with your investments. Are you saving for retirement, a down payment on a house, or your child’s education?

 

2. Create a Budget: Assess your financial situation and determine how much money you can afford to invest regularly.

 

3. Educate Yourself: Learn about different types of investments and how they work. Books, online courses, and financial advisors can provide valuable insights.

 

4. Choose Investment Accounts: Open the necessary accounts, such as brokerage accounts or retirement accounts (like a PPF or NPS in India).

 

5. Diversify Your Portfolio: Spread your investments across different asset classes to reduce risk. A diversified portfolio might include stocks, bonds, mutual funds, and real estate.

 

6. Start Small: Begin with small investments and gradually increase the amount as you become more comfortable.

 

7. Monitor and Adjust: Regularly review your investments and make adjustments as needed to stay aligned with your goals.

Why should you invest?

Investing helps grow your wealth and achieve long-term financial goals. While saving is important for short-term needs and emergencies, investing is crucial for building wealth over time and achieving larger financial objectives such as retirement, buying a home, or funding education.

Benefits of investing:

1. Higher Returns: Investments typically offer higher returns compared to savings accounts. Over the long term, the stock market and other investments have historically provided significant growth.

 

2. Wealth Building: Investing helps you accumulate wealth over time. Through the power of compound interest, your investments can grow exponentially.

 

3. Achievement of Long-Term Goals: Investing is essential for reaching long-term financial goals. Whether it’s retirement, buying a house, or funding education, investments provide the necessary growth to meet these objectives.

 

4. Inflation Hedge: Investments, particularly in assets like stocks and real estate, tend to outpace inflation, preserving the purchasing power of your money.

Drawbacks of investing:

1. Higher Risk: Investments carry the risk of losing money, especially in the short term. Market fluctuations can lead to temporary losses, which might be concerning if you need to withdraw your funds quickly.

 

2. Volatility: The value of investments can fluctuate widely due to market conditions. This volatility requires a long-term perspective and the ability to withstand short-term losses.

 

3. Complexity: Investing can be complex and requires a good understanding of financial markets. Making informed decisions often involves continuous learning and staying updated with market trends.

 

4. Time-Consuming: Managing investments can be time-consuming, especially if you’re actively trading or closely monitoring your portfolio. It often requires regular review and adjustments.

Conclusion

Understanding the differences, benefits, and drawbacks of saving and investing is crucial for creating a balanced financial plan. Savings provide the security and liquidity needed for short-term needs and emergencies, while investments offer the growth potential necessary for achieving long-term financial goals.

 

By balancing both saving and investing, you can secure your present and build a prosperous future. Start with saving to establish financial security, then invest to grow your wealth and achieve your financial dreams.

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What to do when markets are at all time high?

When the market reaches all-time highs, selling all your investments and book profit can be tempting. However, do not let market highs entice you to make impulsive decisions. Your investment decision must align with your long-term goals, not short-term market movements. If you’d like more detailed information on specific investment strategies or market analysis, please let me know!

Certainly! Let’s expand further on each point:

1. Understanding the situation:

 

First, let’s clarify what it means when we say the stock market all-time high. It simply means that the stock market has reached a peak level, surpassing previous record highs. Now, that’s great news for existing investors who have been in the market for a while, but it can also raise some questions and concerns as to what the investors should do next.

2. Don’t panic:

 

This is the most important piece of advice. Just because the market all-time high, it does not mean that it will lead to a market crash.  History shows that markets tend to go up over the long term. So, there have been 63 sessions in the last 20 years since 2020 when the NIFTY 50 ended a month on a new high. And Only in 23 months, the markets fell after a new high. In other words, there have been 40 sessions in the last 20 years when the stock markets kept rising high and clocked new highs after new highs.

3. Diversify your portfolio:

 

One of the key principles of investing is diversification. Regardless of market conditions, it’s always crucial to have a well-balanced portfolio. Diversification helps to spread the risk. So, even if one sector or asset class in your portfolio falters, your overall portfolio will remain stable.

4. Stay Invested for the Long Term:

 

Another important point to remember is that if you have a long-term investment horizon, regardless of whether the market goes up or down, stay invested until you achieve your investment horizon to achieve your financial goals. Trying to time the market and selling when the markets are at an all-time high and buying back it later can be a little risky and maybe even difficult to execute successfully.

5. Rupee – Cost Averaging:

 

A strategy that can help you navigate at a nifty all-time high is rupee-cost averaging. This means investing a fixed amount of money at regular intervals of time through mutual fund SIP regardless of the market conditions. It helps mitigate the impact of market volatility.

6. Review Your Risk Tolerance:

 

It’s very crucial to review your risk tolerance at different intervals of time. Ask yourself questions such as how comfortable you are with short-term market falls or losses in your investments. If market volatility makes you nervous, consider adjusting your asset allocation which is on the more conservative side.

7. Research and Due Diligence:

 

Before making any investment decisions, or investment choices, make sure you do your proper research. Look at a company’s fundamentals, its growth potential, and the industry it operates in, and then make informed investment choices.

8. Have an Exit Strategy:

 

Having an exit strategy is crucial. Deciding well in advance when to sell or when to trim your positions when the market conditions change. This can help you protect your gains and limit your potential losses.

9. Consult a Financial Advisor:

 

If you’re unsure about your investment strategy in a high market, consider consulting a financial advisor. They can provide personalized advice tailored to your financial goals and risk tolerance.

Conclusion:

So, there you have it. Some essential tips for investors to consider when the stock market is at an all-time high. Remember, investing is a long-term game, and it’s essential to stay invested to achieve your financial goals. Happy investing, and may your portfolio always be on the upswing!

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How to Build Wealth with Long-Term Investing.

Would you like to secure your financial future but don’t know where to start? Long-term investing could be the solution. In this simple guide, we’ll explain the basics of long-term investing and show you how to begin your journey toward financial freedom.

What is Long-Term Investing?

Long-term investing is a strategy where you buy and hold investments for an extended period, typically years or even decades. Unlike day trading or trying to time the market, long-term investors focus on the fundamental strength of their investments and are willing to ride out short-term fluctuations in the market.

The Advantages of Long-Term Investing

Why choose long-term investing over other strategies? Here are a few reasons:

1. Higher Returns: Long-term investing gives your investments more time to grow and compound. The longer your money is invested, the greater your returns can be.

 

2. Reduced Stress: By taking a long-term approach, you can avoid the stress and anxiety that often come with trying to time the market. Instead of worrying about short-term fluctuations, you can focus on your long-term goals.

 

3. Potential for Higher Returns: Historically, the stock market has delivered strong returns over the long term. By staying invested for years or even decades, you give your investments the best chance to grow and succeed.

How to Get Started

Are you ready to begin long-term investing? Here’s a step-by-step guide to help you get started:

1. Educate Yourself: Take the time to learn about the basics of investing, including different asset classes, risk tolerance, and portfolio diversification. The more you know, the better equipped you’ll be to make informed investment decisions.

 

2. Set Clear Goals: Define your financial goals and objectives. Are you saving for retirement, a down payment on a house, or your children’s education? Knowing your goals will help you determine the right investment strategy for you.

 

3. Create a Diversified Portfolio: Spread your investments across a mix of asset classes, such as stocks, bonds, and real estate. Diversification can help reduce risk and protect your portfolio from market volatility.

 

4. Stay Consistent: Consistency is key to long-term investing success. Set up a regular investment plan, such as automatic contributions to your retirement account or a Systematic Investment Plan (SIP) for mutual funds, and stick to it, regardless of market fluctuations.

Conclusion

Long-term investing is a powerful strategy for building wealth and achieving your financial goals. By taking a patience approach and staying focused on the long term, you can unlock the full potential of the stock market and create a brighter financial future for yourself and your loved ones. So what are you waiting for? Start investing today and watch your wealth grow over time.

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These eight stocks have seen a surge in mutual fund investments

 

When big players such as mutual funds invest in stocks, it often acts as a safety net for investors. Fund houses typically have greater access to information regarding a company’s governance and financial health. This is something usually not available to ordinary investors. Hence, when fund managers place their bets on a stock, it can be a strong indicator that a company has the potential to deliver high returns in the long run.

 

So, which stocks have caught the fancy of fund managers? Of the 939 companies invested by actively managed funds between September 2023 and January 2024, there were eight stocks that generated robust double-digit returns in such a quick time, had at least 1 per cent weight in a fund’s portfolio and saw a significant rise in interest from fund managers during the period. IREDA was a standout; it delivered a staggering return of 254.1 per cent during this period.

 

The elite eight

 

These stocks have seen a sudden spike in interest from mutual funds

 

Was this surge driven by high returns?

If you check the table, you’d observe that these stocks did not just have a smart upswing but also caught the fancy of different mutual funds over a short span of four months.

 

That said, whether the increase in stock price and higher mutual fund participation is purely tactical or coincidental is something only time will tell.

 

Our take

 

While mutual funds going bullish on these stocks is a strong nudge for a retail investor, you shouldn’t base your investing decisions solely on what other fund managers are buying. Also, one doesn’t know the precise moment fund managers enter and exit a specific stock, making it risky for individual investors to mimic a fund’s portfolio.

 

So, do your due diligence by understanding a company’s business model and taking account of your long-term financial goals and risk appetite before deciding to invest. If you don’t have the skillset, time or the risk appetite, stick to equity funds.

 

Source- Valueresearchonline

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Should one consider investing in innovative SIPs?

 

Since the equity market is climbing a new high every other day, would you suggest investing through Smart SIP? – Anonymous

 

Smart SIPs are an innovative offshoot of a regular SIP.

 

They are smart because the amount of money that gets invested in equity each month depends on how the markets are faring.

 

They have an algorithm that decides whether the markets are expensive or cheap based on specific parameters. So, if the algorithm believes the market to be richly valued, only a part of your SIP amount is invested in equity. The rest of it is diverted to a liquid fund, which is a type of debt fund. And if company stocks are trading at a discounted price, more money is invested in equity and less in a liquid fund.

 

That is broadly how smart SIPs work.

 

In theory, it looks like a winning strategy. You invest less in equity when they are expensive and seek refuge in a debt fund, and vice versa. But in practice, there is an element of timing the market, which no-one can perfect on a consistent basis.

 

The power of simplicity

 

In fact, the plain-old SIP is actually a solution to the problem of timing the market. In this case, you keep investing in the market regardless of whether it is expensive or undervalued. While this may read like a high-risk option, SIPs benefit from rupee-cost averaging.

 

For the layperson, rupee-cost averaging means that you buy more mutual fund units when stock prices go down and fewer units when prices are high. So, this simple yet effective strategy negates the risk and stress of second-guessing and timing the market. Additionally, it helps you to be disciplined with your investments, a key ingredient to building wealth in the long run.

 

To summarise, we suggest you stick with regular SIPs and keep it simple.

 

Source- Valueresearchonline

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This wealth manager says even risk-takers must invest in debt funds. Here’s why

 

Known for his insightful investment nuggets on X (formerly Twitter), Kirtan Shah commands a substantial fan following on social media. As managing director of private wealth at Credence Family Office, which manages over Rs 10,000 crore in assets, he is associated with the wealth industry. But that’s not all.

 

As part of the education and training industry, he heads two ventures, FPA Edutech, a training provider of international certification programmes, and Ambition Learning Solutions, a leading player in the BFSI training industry, both of which he co-founded several years ago.

 

Shah, spoke to Moneycontrol’s Maulik M about how to design a simple portfolio and the importance of staying invested for the long term.

 

When the equity market is at a high, many investors say they want to wait to invest. What would you say to them?

 

This is a well-known fact and there are enough data studies to show that every time you invested at a market peak but stayed on for a longer time, your experience would have been the same had you invested at any other time.

 

Very specifically, if you’re a sophisticated investor, and you understand valuations are expensive, or you understand there is a strong resistance (technicals), and you want to wait, that’s a call you can take. But 99.9 percent of retail investors don’t really have the capability to judge this. If you are confident in the India story, and believe in at least 6-8 percent GDP growth roughly, plus a 4-6 percent inflation, I don’t see a reason why markets will not deliver about 12 percent CAGR (compound annual growth rate).

 

As a retail investor, you have only two things in your control. First, how much you save, and second, how long you stay invested. You can’t predict the return you will make or what (large-, mid- or small-cap, or value or growth style) will work in the markets in the next few years.

 

So play to your strengths, invest as much as you can and remain invested for as long as you can.

 

If someone has Rs 10 lakh today, where should they invest it?

 

First determine your risk profile and then, design an asset allocation strategy. So if you’re an aggressive investor, you would want more money in equities, if you’re conservative, you would want less. But both investors will still need other assets, too.

 

For example, if you are an aggressive investor, I would still suggest that you have 20 percent in fixed income and gold depending on what you read about the macros.

 

I am always asked why an aggressive investor must also have fixed-income investments. Even if I don’t talk about how that reduces risk without hampering returns, I would say, when the market falls, say, by 20 percent, most of us don’t have any additional money to invest. At such times, you can use this fixed income portion to buy markets at lower levels.

 

More specifically, I have a very simple formula.

  • In equity, you don’t need more than four or five schemes, irrespective of your investment amount, whether Rs 10 lakh or Rs 10 crore.

 

  • Split this equally between large-cap, mid-cap and small-cap funds, because you don’t know what will work in the next few years.

 

  • Make sure that your investment horizon is at least 8-10 years.

 

  • Also make sure that you have a good balance between fund houses that follow the value style and those that follow the growth style of investing.

 

  • Then, some part of your portfolio will definitely be performing irrespective of the cycle that you are in.

 

  • For fixed income (for an aggressive investor), you can put money in a medium-duration fund and a credit risk fund. Currently, we feel interest rates have topped out and that medium- and long-duration debt funds will do well for the next few months. But when rates are low (24 months from now), credit funds will start doing well. So that gives balance to your fixed income portfolio.

 

In equity, why not simply go for flexi-cap funds, instead of a mix of large-, mid- and small-cap funds?

 

 

In India, typically flexi-cap funds work like large-cap funds. On the other hand, when you invest around 33 percent each in a large-cap fund, mid-cap fund and small-cap fund, then the risk of this strategy is as good as a large cap fund (based on standard deviation) and your returns are as good as for mid-cap funds. On a risk-adjusted basis, it’s better than investing in flexi-cap funds, with your eyes shut. There are hardly two or three flexi-cap funds that are genuinely flexi-cap.

 

What do you think of gold as an investment? And what about investing in it today?

 

For me, gold is a tactical bet. I hear a lot of us saying that we should have gold. But what is going to significantly change in your portfolio with a 5-10 percent allocation to gold? Nothing.

 

If you look at the last 12 years, gold’s dollar return has been 0 percent, and the rupee return has been 3.5 percent, and that’s only because the rupee has depreciated. So, what problem is gold really solving in your portfolio? To me, it is an extremely tactical bet.

 

Is that bet going to work, today? I think, yes.

 

Gold works very differently in terms of dollars and in terms of rupee. First, gold in dollar terms—whenever the dollar depreciates, gold will go up because then people buy more gold. Are we expecting the dollar to devalue? The answer is yes, because we think interest rates globally have topped out and when rates start falling, you will see the dollar depreciate. So in terms of dollar denomination, we think gold will do well.

 

But I’m not sure how well it will do in rupee terms. India is expected to be a far stronger emerging market (EM) currency versus others in the EM space. So if the dollar were to depreciate, the rupee would go up. This will be counterproductive for gold returns in rupee terms.

 

So your bet depends on both these factors, and they are both at pivoting points right now. So a retail investor should not take this bet.

 

Do debt funds still make sense after the loss of indexation benefits in 2023?

 

As a retail investor, I have multiple other options. I can go for corporate deposits and fixed deposits in small finance banks. Now, we can argue that interest rates are going to fall and so long-duration funds will do very well (give capital gains). But that is not written anywhere. So these funds are not meant for retail investors.

 

But for a sophisticated investor, I think long-duration funds are still the most appropriate option, provided you understand the interest rate cycles. Making around 8-8.5 percent is no problem at all if you can give it two to three years and understand the cycles. Debt funds give many advantages to a sophisticated investor—ease of liquidity, multiple categories to choose from depending on risk capacity, and scope for diversification. So, such investors should still stick to debt mutual funds.

 

What are some of the biggest investment mistakes to avoid?

 

  • Looking at the last three years’ returns and investing in the market.

 

  • Investing based on some data points given on media or social media.

 

  • Diversification does not mean having 20 funds. Many investors keep adding newer funds in the name of diversification.

 

  • Lack of discipline. Most equity fund SIPs (systematic investment plans) close in two years’ time.

 

Source- Moneycontrol

 

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Investing needs time and attention

 

Some five years ago, I wrote a column on an American startup called ‘Long-Term Stock Exchange’. Before I tell you anything more, I’d like to point out that the venture has, for all practical purposes, failed. However, the idea was genuinely interesting. An entrepreneur named Eric Riese decided to find a way to cure short-termism amongst equity investors, so he came up with the idea that people would invest for the long-term if their holdings in a stock automatically increased as time went by.

 

Of course, the holding can’t grow so he modified the concept and decided that the voting rights for each share should go up. He decided to set up a stock exchange where this kind of automatic adjustment would happen to companies that were listed on it. This sounds like a weird concept, and it is. But America is a weird country, so not only did he get venture funding for this exchange (from no less than Marc Andreesen) but also got permission from the regulator, SEC, to set up this exchange. Needless to say, nothing much came of this startup exchange. Still, it’s better to have tried something fundamentally innovative which tackles a difficult problem and then fail, rather than failing at yet another copycat startup as so many others do.

 

The underlying problem is perhaps the most serious one in equity investing. Many, perhaps most investors have an unbelievably short-term perspective. They have a definition of long-term which is ludicrously short. If you listen to social media discussions on the issue, you will find that opinions are divided, ranging from a high of seven months to a year down to anything that is not day trading. Even the government’s official definition is just one year!

 

Some years ago, Fidelity Investments conducted a study in the US to find out what kind of investor accounts had the best returns. It was observed that the greatest returns came from investors who had neglected their investments for several years, or even decades. Interestingly, many of these investors had passed away a long while back – the ultimate in do-nothing long-term investing. Even though one cannot recommend this as a strategy, it’s nonetheless an interesting finding.

 

In recent times, I have felt that one of the root causes of investors not venturing into long-period investments was simply not wanting to do the work in understanding a business. When you invest for the typical few days to weeks, you just need to have a view of the stock movement, it’s enough to just have a view on the stock price – there is no need to know anything about the company itself. However, if you do invest for a year or years then you have to have a view on the company, the sector, the underlying business, the management – in fact, everything about the business itself.

 

There are two problems with this. One, investors do not have the time. And two, in this age of sentence-length media and social media, they do not have an attention span. This sounds like the same problem but it isn’t. It can take days to understand the basics of a business and even when they have the time, I find that the patience required to understand a company is simply not there. Most of the investing world is complex and if anyone gets used to the information style of Twitter or Instagram, then understanding complex things becomes almost impossible.

 

For investors who want to invest in a long-term, fundamentally driven way but cannot spare the time, it’s best to outsource the attention and the research to a mutual fund, or a stock advisory platform like dvmint.com. If that’s all you want, it’s fine. If you want to use these as a stepping stone to do more yourself, then that’s even better.

 

 

Source- Valueresearchonline

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Investments and goals: Why you need the guidance of a financial adviser

There is a lot of narrative around how managing your own money is quite simple, but that’s not the case really. Financial planning is not only investment planning. It includes liability management, risk management, goal-based planning, estate planning, tax planning, etc. How many of us can confidently say that they have adequate life insurance and health cover? Most would be under-insured and worst; not insured at all.
How do you know if you have selected the right investment management product? You won’t know till you actually face adversity; till then, the cheaper plan will look good. Does the family know how to settle any obligations or property claims after your death? While the number of insured in India is just 5%, only 0.5% in the country actually has a will.
Most of India is under-invested because they have no idea of how much should they invest for their goals. In the rush to generate better returns, people make investing mistakes and can’t achieve simple possible goals.

The investing puzzle

 

How many of us understand the right asset allocation to have in accordance with our risk profiles, time to the goal, liquidity needs and return expectations?
India has more than 1,500 mutual fund schemes, over 400 portfolio management services (PMS) providers, 200-plus alternative investment funds (AIFs), more than 500 non-convertible debentures (NCDs) and bonds, over 100 fixed deposit options and thousands of other investment products. How does one decide which ones to invest in and which ones to avoid?

The problem does not stop at deciding the right asset class or product category, but also zeroing in on specific funds, asset management companies and fund managers.
For example, in the last three years, the worst-performing small cap fund gave 27.5% annualized return, but the best gave 47.7% annualized returns. The difference is of a staggering 20 percentage points. So, you can see anywhere between 27.5% and 47.7% returns, depending on your ability to pick the right fund.
Forget about the 20-percentage-point difference, even if the difference is three percentage points, the outcome is hugely different. For example, ₹50,000 monthly SIP (systematic investment plan in mutual funds) for 25 years, at 12% annualized returns, will become ₹8.5 crore. The same ₹50,000 SIP for 25 years at 15% will become ₹13.7 crore, a difference of a whopping ₹5.2 crore.

You will now say, okay I will invest in Index! That still does not solve your problem, unless you can get the right asset allocation. There are hundreds of index and exchange traded funds (ETFs). Most don’t even know that ETFs are mutual funds, that’s unfortunately the level of financial literacy among Indian investors today.

Behavioural issues

 

Let’s say you know it all, but remember wealth management is less of investment management and more of behavioural management.Will you hold your investments for 25 years? I keep hearing stories around how had I bought ₹10,000 of this stock, it would be worth ₹100 crore now, but how many of us have really held on for so long?

Investing is not as simple as it looks.

Managing risks

 

Risk management is a crucial element of financial planning that most investors tend to ignore. Having adequate life insurance cover can ensure that your family’s needs and goals are taken care after your death. An adequate health cover can ensure that you don’t have to take a significant hit on your savings and investments in case of a medical emergency.

These risk-mitigating instruments are what can set the foundations of your entire financial journey. However, you need a financial adviser to tell you how much insurance cover you need to take care of your family’s current and future goals. Also, what health cover you need to ensure that your medical costs are covered even after accounting for medical inflation.
So, you often need a friend, philosopher and a guide to help you through the journey. Here is where a Sebi-registered investment adviser and a competent financial planner can play an important role in your investment journey.
Source- Livemint
Posted on

Wealth creation is not a magic, make sure it happens by method

 

As we celebrate the World Financial Planning Day on 4th October this year, let’s chat about something we all know but often overlook—financial planning. Financial planning isn’t just for the elite or the well-versed as often misunderstood, it’s for every Indian who aspires to secure their future.

 

Why Financial Planning Is a Big Deal

 

Picture this: You decide to go on a road trip without any idea of your destination, no map, no GPS. Fun at first, but you’ll soon find yourself lost, frustrated, and maybe even running low on fuel or battery as applies to you. That’s what life can feel like without financial planning. Here’s why financial planning is a must-do.

 

1. Your Goals Are Your Roadmap: Just like you’d set a destination for your trip, financial planning helps you set and prioritise life goals. Whether it’s buying that dream home, sending your kids to college, or retiring comfortably, a plan gets you there better and generally with less stress.

 

2. Unexpected Potholes: Life’s full of surprises—some good, some not so much. A well-thought-out financial plan is like having a spare tyre for those unexpected flat tyres in life.

 

3. Money Multiplier: You know how your smartphone battery drains when you use too many apps? Well, your money does the same if you don’t manage it wisely. Financial planning helps you keep your money working for you, not against you.

 

4. Zen Mode: Imagine having adequate money set aside for emergencies and life’s little luxuries. Financial security brings peace of mind, and that’s worth its weight in gold.

 

Financial Planning in India – The Reality Check

 

So where does the Indian scenario stack up on all this? We’ve got a lot going for us, but we’ve still got some ground to cover when it comes to financial planning.

 

1. Financial Literacy Gaps: Many of us never learned the ABCs of finance. It’s like trying to play cricket without knowing the rules. We need better financial education, starting from schools to workplaces.

 

2. Insurance Missteps: A lot of us are underinsured or don’t have insurance at all. It’s like riding a racing bike without a helmet. Comprehensive insurance should be a no-brainer.

 

3. Stashing Cash: We’re known for saving, but sometimes we just hoard cash or park it in low-yield investments. Imagine having a supercar and only driving it at 20 km/hr. It’s time to rev things up and explore better investment options.

 

4. Retirement Myopia: Retirement planning is still a new concept for many. It’s like ignoring the scoreboard in a cricket match and hoping to win. Start planning for retirement early; your future self will thank you.

 

Benefits of Getting Your Financial Act Together

Now let’s talk about the good stuff—how getting your financial ducks in a row can make your life better.

 

1. Freedom to Dream: Ever dreamed of quitting your job to travel the world or start your own business? Well, financial planning can make those dreams a reality.

 

2. Stress Buster: Financial worries can give you sleepless nights. But with a solid financial plan, you can relax, knowing you’re prepared for life’s curveballs.

 

3. Money Magic: Smart planning can make your money grow faster than a magic beanstalk. It’s not about making more money; it’s about making the most of what you have.

 

4. Legacy Building: Wouldn’t it be amazing to leave a legacy for your kids and maybe grandkids? Financial planning helps ensure your wealth sticks around for generations to come.

 

 

World Financial Planning Day: What’s the Big Deal?

Now, why should you care about World Financial Planning Day? Here’s the lowdown:

 

1. Wake-Up Call: It’s a reminder that financial planning isn’t just for the rich and famous; it’s for all of us. Time to roll up our sleeves and take control of our financial future.

 

2. Community Vibes: This day brings together financial experts, everyday folks like you and me, and everyone in between. It’s like a big financial planning picnic, where we share tips and stories.

 

3. Think Global: Money matters are universal. On this day, we realise that the same rules apply whether you’re in India, the US, Europe or anywhere else. Financial planning is a worldwide team effort.

 

4. Be Empowered: World Financial Planning Day is your chance to get the scoop on how to make smart financial moves. It’s like having a personal financial coach on speed dial.

 

So, as we celebrate World Financial Planning Day, remember this: Financial planning isn’t rocket science; it’s life science. It’s about making your life easier, more enjoyable, and full of possibilities.

 

Take a step today, set some goals, protect your dreams, invest smartly, and plan for your golden years. It’s your journey, and with a little financial planning, it’s bound to be a lot smoother and more rewarding. Here’s to your brighter financial future!

 

Cheers to World Financial Planning Day!

 

Source- Economictimes

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