Here’s an interesting fact: the 10-year “published” returns of systematic investment plans of most small cap mutual funds is a mind-bending 16-18-plus percent per annum today.
Putting this in perspective: a monthly SIP of Rs 10,000 over the past decade would be worth more than Rs 30 lakh today, translating to a profit of Rs 18 lakh on an investment of Rs 12 lakh – a staggering absolute return of over 150 percent.
And yet, the number of investors who earn such fantastic returns are few and far between. Why? Because between “published returns” and “actual returns” lies the big bad “behaviour gap,” which even seasoned investors are not immune to and is a virtual certainty for new investors who face volatility for the first time. And what could be more volatile (and rewarding) than investing in small caps?
We will circle back to the behaviour gap and its devastating effects later. First, let’s start with an interesting checklist.
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After all, the genesis of all change is self-awareness and introspection, and knowing how susceptible you are to your own emotions is the first step to managing them.
As you read these points, keep a count of how many of them you tick off.
A “behaviour gap” checklist
• When it comes to investing, I believe that “more information is better”
• I sometimes ask my family and friends for investing-related tips
• When my mutual fund SIP returns are in the negative after 12-18 months, it bothers me
• In the past, I have invested in traditional products such as PPF, FDs and life insurance for long-term goals such as my retirement or my kid’s education
• I believe that the ability to “time the market” is important for creating wealth from my investments
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• Global events like pandemics, wars, inflation, and politics make me worry about my portfolio
• In the past, I have invested in stocks or equity mutual funds because others around me were doing so
• I believe that stock/mutual fund selection is the most important determinant of investing success
• In the past, I have sold my investments with the intent of buying them later after a price correction
• I check my investment portfolio frequently – usually, more than once a week
Did you check three or more of these points? If yes, we hate to break it to you, but like most people, you are highly susceptible to greed and fear.
And, to paraphrase the great Benjamin Graham who (literally) wrote the book on intelligent investing, you are likely to be “your own worst enemy” when it comes to investing.
The role of human behaviour in successful investing cannot be overstated. And while many biases exist, they all chiefly manifest in two forms – excessive risk aversion (“fear”) or overexuberance (“greed”).
Fear is what keeps you invested in negative real return investments for goals that are years or decades away because you prefer the comfort of linear, non-negative returns over volatile and inflation-beating growth. It also compels you to dump your investments after they have fallen in value (ironically, at the point of maximum financial opportunity).
Greed is what draws you to borrow money and trade options, futures or cryptocurrencies without fully understanding (or turning a blind eye to) the risks involved. It also drives you to invest after the markets have gone up (at the point of maximum financial risk). Predictably, some 89 percent of traders end up losing money over the long term.
The ailment has come into focus now – but what about the antidote? Is there even one?
Unfortunately, there is no silver bullet solution here. Since any long-term wealth creator will come with its fair share of volatility, a clear understanding of risk and reward would be a good beginning.
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While many advisors spend time eulogising funds and their past returns, we routinely ask our clients to look at the worst quarter, worst month and worst year returns before investing. After all, this is the price to pay in order to achieve long-term compounding, so there’s no point shutting your eyes to it.
Making an “educated” investment and setting expectations properly right at the outset is critically important.
Surprisingly, the most effective way to counter greed and fear lies in the rather simple act of goal-based investing. When you “invest with purpose,” in line with a financial plan (instead of making ad hoc investments), you automatically align yourself to the bigger picture (for instance: your retirement 20 years away) instead of worrying obsessively about short-term fluctuations in your portfolio. Your ability to remain invested and persevere through the ups and downs goes up manifold.
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Additionally, the support of an investment expert to handhold you on your journey can prove to be invaluable. Even the best players need coaches, and a great advisor doubles up as a behavioural coach to save you from yourself when you need it the most.
The key to successful investing, contrary to popular belief, is not fund selection but investing behaviour. Don’t focus on returns – focus on goals, invest with the right purpose.
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