Many retail investors shy away from investing in equities. Lack of inclination, patience, curiosity and above all, knowledge, have deprived many retail investors of a bona fide and effective way of earning reasonably good money. Besides this, the oft-quoted and scarcely understood expression of “volatility” has proved to be another dampener for investors even if they think of investing in equities. In fact, many experts point out that following the age-old wisdom of “buying at low price and selling at high price” works especially in the long-term. There is a practical way to understand these nuances. Let us delve deeper into these:
We will follow a practical approach to make you realise that in the long-term an investor who invests consistently only gains. In markets, a smart investor buys shares at a low point of the markets. And converse of this also holds good - a not-so-experienced investor buys at a peak of the stock markets. What if we compare their performance with the historical data?
Let us assume that a smart investor invested Rs 1 lakh each year at the bottom of the Nifty 50 index Total Return Index (TRI) for a decade between 2002 and 2011. Now, in the next decade-between 2011 and 2022-the investor does not invest. She just holds on to her investments she made between 2002 and 2011. The value of her investments has jumped to Rs 1.09 crore in 2022. In a similar fashion, now, let us look at a not-so-experienced investor who invested `1 lakh each year at peaks of the Nifty 50 index TRI for a decade between 2002 and 2011. Again, she does not invest in the subsequent decade which ends in 2022. Again, the value of her investments she made between 2002 and 2011 has grown to Rs 67.86 lakh. In both situations, an investor invested Rs 1 lakh every year for a decade and earned a huge sum.
A key and practical lesson to learn from these data points is: the stock markets reward investors in the long-term. Timing the market is next to impossible. Both the above situations are extreme examples. One can neither be consistently unlucky to invest at every peak of the markets nor lucky enough to capture the lowest points of the markets. Hence, it makes sense to start investing as early as you can and keep investing at regular intervals. This ensures that you get to participate in the stock market at all levels.
Sometimes investors end up not investing when the stock markets are going up. They assume that they will be investing in markets at a high level. As a result of this, these investors watch the markets like a bystander. Nobody makes money by just watching the market. In markets, there are no fixed patterns. Historical data points out that there have been prolonged bull phases in markets. And investors who shy away from investing in markets when they are at a peak lose out on opportunities to make fairly good returns.
All these learnings make it very clear that it is a lucrative and wise decision to invest regularly and hold on to your investments in equities for the long-term. The journey of your investments may not be always smooth. There will be periods of corrections when you see the value of your investments going down. But if you stay put with your existing investments and keep adding to them there is a good chance that you would end up making good returns which will comfortably beat inflation and help you achieve your financial goals.
This is a practical and effective way of creating wealth in the long-term. Investors need to identify their financial goals, ascertain their asset allocation and prepare an investment plan accordingly. Investing through Systematic Investment Plan (SIP) route can help you increase your investments in the long-term. This is because “investing at regular intervals” and staying invested for a longer time gives you a very good chance of reaching your investment goals.
G Pradeepkumar
(The author is the CEO of Union Mutual Fund)