Why people lose money when markets scale new highs
Why are some investors still not seeing the returns they expected, even though the stock markets seem to conquer newer heights every day?
Why are some investors still not seeing the returns they expected, even though the stock markets seem to conquer newer heights every day? As I write this, the markets have so far been on ‘Main Street’, rising fast and high, bringing fantastic gains to the individual investor.
From Main Street to Dalal Street
The benchmark index, NIFTY 50 (a diversified 50 stock index accounting for 12 sectors of the economy and used for a variety of purposes including benchmarking fund portfolios, index based derivatives and index funds) represented nearly 63 percent of the free float market capitalization of the stocks listed on the National Stock Exchange currentl. Nifty has delivered 21 percent absolute return in CY2017.
Despite the November 8, 2016 announcement on demonetisation by the Government of India leaving the economy unsettled, one can only be astounded by the continued buoyancy of the markets. Further, it has become almost impossible for a day to pass, over the past few weeks, in fact months, without hearing from market pundits and the financial media alike, of how markets are soaring to euphoric highs and going further up. Both the NIFTY 50 and BSE SENSEX 30 have in the recent past surpassed their previous peaks. Individual stocks have also more than doubled in less than a year. In such a situation one feels as if one is missing out on all the action on Dalal Street.
Life in the fast lane
However, in a world fast changing, with ever greater emphasis on speed and efficiency, every aspect of life has become about being quicker and more agile. Every day presents a new buzzword or novel phenomenon. We are today living among ‘unicorns’ (a term coined by venture capitalist Aileen Lee to denote a start-up valued at over $1 billion- Uber, Xiaomi, and Airbnb being some of the biggest unicorns), ‘millennials’ (people born between the early 1980s to early 2000s) and being influenced by ‘crowdculture’ (the new force that describes how digital crowds are driving modern culture). Everyone across age groups aspire to get things fast, easy and with the buzz that’s cool and #trending.
From banking to books, cosmetics to cars, and everything in between, we demand things to be immediately available, without investing much time or effort. Either online or offline the commodity should be available at slashed rates or with easy payment options. The ubiquitous apps decide on your mobile / (insert choice of device here), in one quick swipe or touch what can be almost instantly delivered to you. We are driven by the immediate and are on the constant lookout for the next trigger that will thrill us.
‘Smart’ investors to smarting about investments
Investors too, (yes, you, me, all of us) want the same quick deal. Who doesn’t want to invest today and immediately reap tomorrow? In the process, it becomes difficult to think of the long term and even harder to stay invested for the longer term. In this pursuit for instant gratification we make some extremely judgemental errors of investing our hard earned money in opportunities that promise quick returns, be they through the convenience of online investing or promises of high yield-high risk investment avenues.
The internet is a great resource to do your research, carry out the investment and keep track of the same, but however quick and fast the information highway is, the danger of over-speeding without limits always lurks just round the corner. These quick and trendy options make us exercise them more frequently. In a ‘smart’ world, we incessantly tend to consider ‘smart moves’ - of switching investments- selling a stock today post a small loss, buying another stock the next day after a minor gain, and then shifting completely out of the markets the third day. Eventually, we get bogged down with our investment decisions going awry and while smarting over our failed investment strategies decide investments is after all not our cup of tea.
Bridging the gap: suitable rewards for reasonable timeHave you wondered why is it that we are not able to take the right and sensible decisions regarding our investments? Have you considered that the decisions might be perfectly right, but it also might be that our impatience is the root of our confusion? The celebrated financial planner, Carl Richards explains this phenomenon-the distance between what we should do and what we actually do- as "the behaviour gap" (also the title of his best-selling book).
Let’s be absolutely clear - all investments carry a potential risk and suitable rewards will accrue in time, subject of course to the liquidity constraints of each asset class. Therefore, once you have narrowed down on a product or idea that you find appropriate and fits your investment needs and horizon, it is only prudent to stay invested for a reasonable period of time. Whatever the category of the investment, given a fair amount of time, you are sure to make the suitable returns that you will find fruitful and worth your while.
Seek and you will find the best of investment opportunities
To sum up, some of the prime factors why we as investors do not profit as much as the market delivers (and how to overcome the gap): Not investing today, waiting for tomorrow (investments cannot be treated as New Year resolutions which are never followed as promised); Being ignorant of the right investment avenue that suits you (acknowledge and explore maximum possible opportunities to optimise your financial resources); Sticking to the mind-set that a public sector bank fixed deposit / real estate is the only safe investment option (think beyond the conventional, the number of financial opportunities available now include among other things mutual funds, insurance, and more); Not staying invested long enough (as stated above, suitable rewards will accrue in reasonable time); Switching investments to make allegedly smart moves, which prove to be quite not that smart in hindsight (be insightful of the time horizon and investment opportunity); Not seeking advice from professionals (similar to soliciting a lawyer for legal advice, professional investment advisors can and will help you invest better and more intelligently).
As an investor plunging into the financial markets trying to make your hard earned money work for you, you should ideally spend some time to understand how to make your money multiply while ensuring growth and safety over time. Benefit from the expertise of a professional investment advisor and just stay invested in a good investment. These steps will ensure that your investments are secure and still outperform the best yields the stock markets deliver.The author is Founder & Managing Partner of Germinate Wealth Solutions LLP