Investors get carried away by short term performance of asset classes. After the expected returns do not materialise, there is a tendency to blame the external factors such as advisor's influence than lack of home work by the investor himself.
Recently, I read a post on social media about how the stock market is misleading the investors. The immediate thought that came to my mind was, “It feels so good to suggest that the market is misleading than to think that I am getting misled.”
This reminded me of an interaction I had some time ago with an old gentleman, who shared his experiences with respect to investments in mutual funds.
At the peak of the market during the tech boom of early 2000, he was approached by one smart looking investment advisor representing a respectable firm. The investor got carried away by the great presentation (one is not sure if it was only a great presentation or the recent past performance of the fund in question or the stories of growth in IT doing round in those days) made by the advisor and invested some money in a technology fund. He did not share the name of the fund, though. As it happened with most, he also lost a considerable amount of money when the prices crashed. It took him a while to digest that he has encountered a loss. In his words, subsequently, the investor and the investment advisor decided to lay the blame on the fund manager that he failed to deliver what was promised. It was a shock to hear such a thing. Who did the fund manager promise? One is not sure whether the investment advisor ever met the fund manager in question. And the decision to lay the blame also seems to be coming from a very deep psychological reasoning.
Failure is a part of life for those who try. It is unavoidable and in many cases, even when someone has made the efforts to win, the victory eludes one and failure is staring in the eye. It is not easy for most to embrace this situation. In almost all such cases, when you do not get the desired results and the enemy is not visible (market forces in this case), one is considered either a fool, who got to the situation on account of some stupid decisions and actions; or victim of the circumstances.
It is better to be known as a victim rather than a fool. A fool would get ridicule; whereas a victim would get sympathy – the latter appears to be a better choice.
The example of the old gentleman cited in the beginning clearly illustrates this point. Now that loss is a reality, who is responsible for the same? If only the investor had done some homework before investing, he could have been in a better position. And, yes, he would not have taken so long to decide where to lay the blame. Since in this case, even after putting the blame with the fund manager, what was the recourse to the investor? The attempt here is not to defend the fund manager in question – we did not even discuss the name of the fund in this case, as mentioned earlier. The fund manager had built the portfolio in line with the objectives laid out in the offer document and probably took higher risks than warranted. But he took higher risks only with an idea to extract higher returns from the prevailing situations.
Only if one tries to find out the objective of the fund and the style of the fund manager, one is better able to match one’s own style and risk appetite with that of the fund and the manager. And it is this matching rather than the return one gets from the portfolio is the essence of financial planning. The return generated by a scheme, or a sector or an asset class for just one period is always the wrong data to look at.
If you want to look at the historical data, make sure, you look at performance across market cycles (whatever market you are considering to invest in).
The author runs Karmayog Knowledge Academy. The views expressed are his personal views. He can be reached at firstname.lastname@example.org.