Cost of investing in equities is that it is a volatile asset class- there will be times when your portfolio value will be lower than what you invested
“I am an ordinary investor, investing monthly through SIPs in mutual funds. Markets are volatile and I see that I’m losing money every day. I think I should stop investing till markets stabilize. Am I correct?”
“I want to make money but don’t want to take risks. I can’t bear to see my portfolio in the red. What do I do?”
I come across questions like this every day. Well, the answer is actually more straightforward than you think. Stay invested. Continue investing. In equities, your time horizon should be 5-7 years at least.
If you are buying units- that is what you are doing as a mutual fund investor; if you are buying, why would you be upset that the price has now fallen?
I know, because you have also invested before and the value of that has fallen. Remember one thing, this is notional, the profits and the losses. It isn’t real till you book it. And if your time horizon is for another 5-7 years, why would you panic now?
You should be happy that markets are lower when you are investing and that they will be better when you want to withdraw that money seven years later. But you will benefit from that only if you continue investing.
We need to invest in equities because we want more from our lives. We want to live today fully and also have a great tomorrow. Both are generally not possible. You will get one at the cost of another. For example, our parents sacrificed their 'Todays' for our better 'Tomorrows'. And since we want both, a great today and a safe tomorrow, we need to invest in equities which is a growth asset class.
But growth comes at a cost. Cost of investing in equities is that it is a volatile asset class- there will be times when your portfolio value will be lower than what you invested. If you can stomach that, only then will you be rewarded with good returns in the next few and many years.
So, invest in equities with your eyes wide open. Don’t be delusional that you will get great returns just because it has given great returns in the past. Have reasonable expectations. So that they will be met.
No, your portfolio won’t double in three years. Can it? Yes, it can. But it won’t. Invest knowing you will get 12 percent per annum returns but these won’t be given to you every year, you will get this only if you stay committed and stay invested.
Most people exit equities because they don’t see the annual return like FDs, but know that equities are not FDs and so you won’t see returns like that every year. However, if you stay invested for 7-10 years, you will be rewarded for your patience, for your perseverance and will get a better return than FDs.
Someone also asked me what happens if they make mistakes in investing? The rule of any mistake applies to investing as it applies to life. You pay for your mistakes. In investing, you might pay heavily and it might hurt more. It hurts more because money is very personal to us. It also hurts because we think anyone can be a great investor. Yes, anyone can be a great investor, provided he has the time, expertise, enjoy learning it as a subject and can be unemotional. However, most of us aren’t but would like to think that we are.
Most DIY (Do It Yourself) investors I speak to say though they haven’t formally studied, they spend 4-5 hours a week reading on investing and so can invest by themselves. However, If I claimed to do the same, they would not trust me with their investments, would they? We are biased when it comes to us. So, don’t hesitate, seek advice. You don’t need to learn from your mistakes, it might be a very expensive lesson.The writer is the founder of Investography.