Were you investing in stocks some 12 months back? Are you now considering stopping your investments for some time? I would like to apologise in case I am bugging you, however I am asking these questions because these days I come across many retail investors who seem to have the same view i.e., “The markets are looking in a bad shape now, so I am thinking of not investing now. I will restart later when the market looks better.”
Though it may not seem appropriate, however, to me its like saying, “This burger used to cost Rs 60 and is now costing very cheap at Rs 40, there must be some problem, so I will not buy it. I will buy it later when it will again cost Rs 60.“
There can nothing be more disastrous and worth mocking at than waiting for the fast food corner to quote Rs 60 for a burger which can be availed at Rs 40 and I am sure you would not commit such a mistake. So, if you won’t wait for your burger to cost you 50% extra, then why wait for the stocks and market to go up.
Donâ€™t take this the wrong way, but everything youâ€™re thinking and feeling about the stock market is usually dead wrong. Itâ€™s a basic premise of behavioral finance, that folks behave irrationally when it comes to their investments. People are panicking like the world is coming to an end? Time to buy. Your Pan wala or your wife is giving you stock tips during a raging bull run? Time to sell
See, investing during bad times is the core idea behind earning good returns and if you can psychologically brace up yourself to invest when the market is declining, you can easily accumulate more wealth than your neighbor 🙂
Note: This should not be construed as an advice to invest all the surplus cash. All we are saying is that if you were investing some amount every month, please continue investing in good compaies and rather increase the quantum at this point of time by cutting down on other discretionary spending. The reason is simple: If you were earlier getting 1 burger for Rs 60, you will now get 1.5 burger for the same Rs 60. I am loving it 🙂
Now, lets talk about the cost of mistake i.e. the difference in wealth creation with some real numbers (From: ET):
Consider that you have been investing in stock market since 1997 through a fund that tracks the SENSEX. You have an SIP of Rs 10,000 a month and you stuck with that year after year ignoring all the noise. In the 14 years, since you started, you would have put in Rs 17.4 lakhs into your investment. Today that investment would be worth Rs 48 lakhs for a total return of 174% over the years, i.e., 13% per annum.
Contrast this with your friend/neighbor, who pauses every time the market crashes. Your friend would probably have stopped investing some time in the middle of 2000, when the SENSEX had declined to around 4000 from its peak of 5900. He would probably have congratulated himself as the SENSEX drifted lower and then restarted investing when it again approached close to 4000.
Then again, your friend would have stopped investing after the market started crashing in early 2008, probably by mid-year when it had come close to 15000 from the SENSEX’s peak of close to 21,000. This time, your friend would probably have come back in mid-May 2009, likely a day or two after UPA won the election and the markets zoomed up.
This behavior, which looks entirely natural, would have pushed down his total returns down to 134% – 11.3% on an annualized basis. Instead of investing Rs 17.4 lakhs and getting Rs 30 lakhs return, he would have invested Rs 12.3 lakhs and got Rs 16.5 lakh returns.
This is a huge difference for any middle class India family. As we said in the beginning, your one wrong decision can make a significant difference to your wealth and the pity is that one gets to know about it when its already too late.
I am sure that at least you would not make such a blunder, while you may also consider guiding your friends.