The slow cook of eq­uity

The Pak Banker - - OPINION - Monika Halan

It al­ways amazes me. The con­fi­dence with which peo­ple make such de­fin­i­tive state­ments. Gold is al­ways the best in­vest­ment. You can't lose on real es­tate. Stocks are a gam­ble. Peo­ple like me, who take a mid­dle-of-the-road ap­proach and talk of diver­si­fi­ca­tion, were hooted down when gold was the best per­form­ing as­set class two years ago or when peo­ple swapped their multi-bag­ger real es­tate sto­ries. To talk of in­vest­ing in eq­uity in the go-go years of gold and real es­tate, when eq­uity was down, was to in­vite de­ri­sion and dis­be­lief. But now that gold is down, real es­tate is in de­cline (held up only by a frozen mar­ket), fixed de­posit (FD) rates are down and eq­uity is mov­ing side­ways, it is a good time for some non-ex­u­ber­ant talk. If the chat­ter on What­sApp groups (when they tire of re­cy­cling the same pa­thetic jokes) is any in­di­ca­tion, peo­ple are will­ing to lis­ten to sense. One for­ward that has come on al­most all of my What­sApp groups is the one ti­tled "Real es­tate: the fall has just be­gun". I traced the for­ward to a blog by cer­ti­fied fi­nan­cial plan­ner D. Muthukr­ish­nan of Wise Wealth Ad­vi­sors, http://mintne.ws/1MhqzZZ . Very sen­si­ble stuff; do read. And re­mem­ber to build in the tax im­pact on the fi­nal av­er­age re­turn num­bers given in the blog of the FD av­er­age be­ing in­fla­tion plus 1%, gold giv­ing in­fla­tion plus 1.5%, real es­tate in­fla­tion plus 3% and eq­uity, in­fla­tion plus 7%.

I would use this time of low ex­u­ber­ance in ev­ery as­set class to un­der­stand some ba­sics about in­vest­ing. First, un­less you can time the mar­ket (and some get lucky of en­ter­ing a bull phase at its start, but credit it to their own smart­ness rather than pure luck), hitch your ex­pec­ta­tions to the av­er­age re­turn num­bers men­tioned above. Greed gets us to lose more money than it earns. Man­age ex­pec­ta­tions of what an in­vest­ment can do for you. If you re­ally want a multi-bag­ger that turns 1 into 10,000, start your own com­pany. Don't ex­pect to ride some­body else's hard work to make those kind of re­turns. Man­age your greed. Re­mem­ber these are "av­er­age", and in­di­vid­ual ex­pe­ri­ence will vary depend­ing on what you bought.

Sec­ond, don't choose a cur­rent flavour-of-the year as­set class and bet your en­tire fu­ture on it; have dif­fer­ent prod­ucts in your port­fo­lio to do spe­cific things. Fixed-re­turn prod­ucts for spe­cific near-term needs, in­sur­ance for pro­tec­tion from un­ex­pected bad events, real es­tate for a roof over your head, gold for… um be­cause In­di­ans like it and need to hold some, and eq­uity for growth and wealth cre­ation. Third, you have no op­tion but to in­vest in the stock mar­ket if you want in­fla­tion-plus re­turns that are low-cost to hold, liq­uid and have low buy­ing and selling costs. The tough­est learn­ing is the one around eq­uity as it is mis­un­der­stood to be a gam­ble rather than a slow builder of wealth. Eq­uity in­vest­ing has its own rules and un­less you fol­low them, you will lose. What are these? One, when in­vest­ing in the stock mar­ket, give it the same pa­tience you give real es­tate-a good eq­uity port­fo­lio needs five years of pa­tience, 10 years to see con­sis­tent re­turns, but ac­tu­ally will slow-cook over 15-20 years.

Two, re­mem­ber that your risk is choos­ing poor prod­ucts and find­ing out af­ter 15 years that your fund man­ager mal­func­tioned. While oth­ers went far ahead, yours did worse than the av­er­age prod­uct in the mar­ket.

Three, if you find your­self frozen while choos­ing out of the eq­uity prod­ucts in the mar­ket-di­rect stocks, mar­ket-linked prod­ucts such as unit-linked in­sur­ance plans (Ulips) and mu­tual funds-and don't want to take the risk of choos­ing a fund man­ager, go with an ex­change-traded fund (ETF) linked to a broad mar­ket in­dex and a mid-cap in­dex. This is the safest way to get the av­er­age mar­ket re­turns with­out tak­ing the fund man­ager risk. You will do worse than the best-man­aged funds, but bet­ter than the worst-man­aged funds. ETFs also have wafer­thin costs now that the Em­ploy­ees' Prov­i­dent Fund Or­gan­i­sa­tion (EPFO) money into the SBI Mu­tual Fund ETFs has re­duced over­all costs for the mar­ket.

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