Here are eight investment truths hours and hours of number crunching and data analysis have taught me. I have always believed that mathematics is the language of nature and that a truly open-minded analyst has a chance of appreciating the “truth” or even attaining nirvana!
1. There is no evidence that long term investing is guaranteed to work. Most equity investors have only hope and past performance to rely on when questioned about why they wish to invest for the long term.
Sadly there are no guarantees with life, marriage, parenting, career etc., and the same applies to investing. However, there is a reasonable chance that equity investing will beat inflation (not your expected return!). Therefore risk management is key!
See: Why should I invest in equity mutual funds when there is no guarantee of returns? And Equity may beat inflation, but that doesn’t mean you will!
2. No strategy will work all the time! Be it time in the market or timing the market, SIP, tactical asset allocation, stock investing, etc. Nothing will work all the time. One person’s experience cannot/should not motivate others to invest or not invest. This is also known as the sequence of returns risk.
If someone says they have a method that has always worked in the past, it just means that they have either not looked properly or the data is not long enough for cyclic behaviour to set in.
3 Everyone is waiting for that bumper stock market return, and therefore, everyone is timing the market (even those who do a SIP) just that the industry wants you to do the timing while being in the market and count notional gains/losses while they count real gains.
4 SIP is not systematic investing. SIP is an automated purchase of mf units on the same day of each month. Investing with a system is systematic investing, and this includes risk management. SIPs do not reduce investment risk. No matter how long you do a SIP, the performance will be poor if the market is down on the day of redemption or return calculation.
5 Once you recognise that it is hard to beat the index, most things about investing seem fluff and unnecessary. However, it is merely a choice, and there are bigger things to worry about.
6 You cannot expect a set return from any mutual fund or stock. We need to adapt if things do not go our way.
7 There is no optimum asset allocation, a mix of funds/stocks or strategy. There are thousands of ways to reach our financial goals. There is no way of knowing which will work and which will not work beforehand. We have to choose a path and change course if required.
8 Unwavering discipline is the only superpower needed to get rich. Not intelligence, smartness, or a lot of money but just discipline. Unwavering discipline.
I am much closer to investing nirvana today than before I started crunching numbers … with an open mind.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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