“Do not wait until the conditions are perfect to begin. Beginning makes the conditions perfect.” -Alan Cohen
The new financial year has begun, and capital markets are abuzz with opinions on the upcoming election results, the liquidity situation, foreign inflows and similar talks.
While these economic events are crucial, I would like to reserve these discussion pointers for the posh boys at D-street and shift my vision to the topic that really matters – your wealth-creation journey!
The new financial year brought in a fresh breath of relief as equity markets rallied to touch meaningful highs (Nifty @ 11,700; SENSEX @ 39,100) – indices recovered and grew beyond what it lost in the last financial year. However, there has been an uncanny increase in the number of requests to address variations of a very specific investor query.
“Markets have peaked/tanked; what do I do?”
There is a good chance you opened this email out of sheer excitement to take an action on your investments. But, here’s why you must take a step back and think!
Action bias, or in other words – the urge to do something when something happens even though it does not necessitate you to do anything, is turning out to be the biggest factor to wealth erosion.
Given that the urge to take action is a typical behaviour-driven situation, I would like to quote a self-explanatory sketch from ‘The Behavior Gap’ by Carl Richards –
While this is a very crude sketch, it is perhaps the most powerful I’ve seen.
There is enough and more data to prove how profitable capital markets are, but the fact of life is that most investors haven’t experienced it first-hand and subsequently tilt towards believing that wealth creation by capital markets is actually a myth perpetuated by the industry.
But let me assure – YOU (read as: your actions) are more responsible for your investment performance than the markets are. Following are the behavioural fallacies that lead to a not-so-good wealth creation experience.
Gap #1: Nobody can time the market, but many try to do so – albeit unsuccessfully
Back to basics. Price of an equity share is determined by the demand-supply mechanics driven by billions of dollars, billions of investors, millions of algorithms. Also, every optimistic buyer at a price point has a pessimistic seller. And hence, it is difficult for anyone to predict the market accurately since that would require predicting the movement of the expansive range of participants.
Gap #2: You can’t wake a person who is awake!
The number one rule for profitability is “buy low, sell high”. Now, I know this is common sense and you already know this. But what you may not know is that most investors tend to do the exact opposite by succumbing to their own emotions. The image alongside, again borrowing from Carl Richards, is how most investors manage their investments:
Gap #3: Time, and not timing, is your friend in the market
Wealth-creation is a long process requiring patience and persistence. It is best to try quick bets in the casino or at the race-tracks. Capital markets, contrary to popular belief, is a more of a wealth-building avenue than a money-minting machine.
Pick any index – perhaps Nifty for this case. In the short term, all you will see is high volatility across a chart reacting to various events. But, in the long term, you will notice an uptrend emerging! It is important to ride the uptrend and ignore the volatility. Be an investor, not a trader.
Fig. 1.1 Nifty: Short Term : 5-day Volatility Fig. 1.2 Nifty: Long Term : 5-year Uptrend
Like Benjamin Graham put it right on spot – “In the short run, the market is a voting machine but in the long run it is a weighing machine”
Here’s the bottom-line: The only reasons why you must take an action on your investment portfolio is if there is a change in your financial goal/plans or if your portfolio requires a rebalancing.
At a fund-level, we are already keeping a close watch on your investments and will notify you in case of any rebalancing required.
If you have any concern, please write to us at firstname.lastname@example.org or call at 080 48039999, we would be happy to answer your query.
Nirav (Head of Research)