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Four reasons why YOU don't make money in stock markets
In the last 10 years, if you had invested Rs 1 lakh 10 in the BSE Sensex, you could have made Rs 5.14 lakh today. But did you? Here are the reasons why...
Since 2001, the bellwether Sensex has grown 17.79% on a compounded basis (CAGR). That means, if someone had invested Rs 1 lakh 10 years back, the amount would have grown to Rs 5.14 lakh today.
In the same period one third of diversified equity mutual funds have delivered a CAGR of more than 25%. That means if someone had invested Rs 1 lakh 10 years back in these mutual funds, it would have grown to Rs 9.31 lakh.
But how many investors REALLY made these kinds of returns?
In this context knowing about the study conducted by Dalbar -- a US based leading financial services market research firm -- to determine how the investment behaviour and decisions impacted the overall investment performance would be advisable. They have done comparative study on the returns of S & P 500 Index and the returns for a 20-year period ending March 31, 2010.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
Four reasons why YOU don't make money in stock markets
The study revealed the following two important facts.
- The average return of the S & P 500 during this 20-year period was 9.14%.
- The average return of the equity investors during the same period was only 3.27%
When the market is delivering so much, why is that the investors make less? What are all the factors contributing to this gap in market returns and investor returns?
Though the market is delivering decent returns, investors were not able to benefit. Why is it so? What goes wrong? It is because of the nature or character of the investors.
Like agriculture getting affected by nature, either because of excess or no rain. But we found out a system to fight against this nature. We built dams. So whenever there is excess rain, dams retain water to save agriculture and whenever there is no rain, it releases water to help agriculture.
Similarly investors are supposed to find and build a dam against their nature and behaviour towards stock market investing in order to get better returns.
And here's what investors should build a dam against...
Four reasons why YOU don't make money in stock markets
1. Fear
When stock market suffers huge losses for a sustained period (like it has been doing since the Euro zone debt scare became prominent), the overall market becomes fearful of sustaining further losses. At that point in time everyone comes up with their own theory, logic, reasoning, and statistical evidence showcasing how their losses could further deepen if they don't square their positions.
While fear has its own meaning for the stock market investors during gloomy times it stands for 'false evidence appearing real'.
Four reasons why YOU don't make money in stock markets
2. Greed
Most of us have a desire to acquire as much wealth as possible in the shortest amount of time. This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term.
So, when you see your stock market wealth increasing you decide to sell your holdings and shift your money into other stocks or mutual funds that somebody informs you could make you huge returns.
As the statistics by Dalbar showed patience pays only in the long run.
Four reasons why YOU don't make money in stock markets
3. An investment portfolio based on your personality
Basing investment portfolios on your personal likes and dislikes are the first of the powerful influences. It is like investing in cars and fancy gadgets just because you love them.
Investing in shares just because you think they are smart or flashy is ambiguous, for they could sink in the long run. It is better instead to invest in profitable ventures that pay in the long run.
It is true; our investment fancies make us pay a heavy price.
Four reasons why YOU don't make money in stock markets
4. Follow the flock policy
The follow the flock for fear of being the black sheep policy makes you an investor who believes in following others in the share markets. The pitfalls of group behaviour lead us to buying high and selling low.
It also leads to unbalanced investment emotions of black or white (wrong or right) with no shades of objectivity and rationality. Buying high and selling low has made many investors suffer heavy losses in the long run.
Four reasons why YOU don't make money in stock markets
A look at positive investment behaviour
It is good to be investment smart with humility and reasonable aspirations to achieve financial goals. I have never known of any high return investments that did not have high risks.
Patience over a lifetime and being able to assume stress helps in aiming for long term positive returns and contributes to assuming less financial stress after retirement.
Positive investment behaviour requires balanced mood, neither elation nor panic. Neither selling in panic due to share market positions or adverse world or country conditions is advisable nor is it advisable to a reaction of extreme financial prosperity, both can destroy lifetime of healthy investments. A long-term investor needs to realise that neither despairing nor elation proves worthy for long term financial portfolios.