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Investments have made money, investors have not.

Passive Investor:

For a passive investor who does not have time or skill to follow the markets, neglecting equity as an asset class is not an option. Mutual Funds and ETF SIPs can be an effective tool for wealth generation via Markets. He has to take care of the following things:


»Time and timing
Every investor’s dream is to buy at the bottom and sell at the top. Predicting bottoms and tops is not only very difficult but also very risky.

But as an investor is timing so important? Let us see.

2 Situations

a) Investing once in a year when market was at its peak.
b) Investing once in a year when market was at its bottom.
 

Investing in Sensex annually for 33 years Average returns
Buying on the worst day(Highest level) 16 % p.a.
Buying on the best day(Lowest level) 17.5% p.a.

What can be seen in the above case is timing is not as important as we believe. Equity Investments is about giving time and not about timing.

»Chinese Bamboo

• The Chinese Bamboo grows approximately 80 feet in 60 months.

• Any idea how much it may grow in 10 months, 20 months, 30 months?

• Surprisingly it grows only 5 feet in the first 50 months.
• From its 50th month to 60th month it shows exponential growth and grows to 80 feet.

• 1992 to 2003 index return = 0%

• 2003 to 2008 index return = 36%

• Similarly 2008 to 2014, index return = 0%

• We will never be able to anticipate when a bull run like 2003-2008 will come so we have to stay invested for a longer run.

• Equity investments have similar characteristics. Historically their average returns are 16%, but they don’t grow linearly. They may test your patience but sound equity investments always give very good return in the longer run.

»Don’t think:“This time it is different”

• History tends to repeat itself. But due to Greed-Fear psyche, investors start believing that “This time it is different”.

• They start taking random decisions of exiting when there is panic in the market and entering when there is euphoria spread throughout.

»Examples:

• In 1992-93 during the Harshad Meha Scam Sensex corrected by 46% in a year (4285 to 2280) but in the next year 1993-94 it rose by 65% to 3778 (2280 to 3778).

• Similarly in 2008-09 Sensex fell from 21000 to 8000 in a year and in the next year it again rose to 16000.

• There are various other examples of maket moving in cycles but investors fail to take rational decisions in such times.

• The result is that they continue to be suffers of the Greed Fear cycle and end up blaming the market.