Why you should treat your investments equally

Life is coming a full circle for Indian stocks. After being the subject of acute investor apathy, their medium-term performance over a five-year period has eclipsed the traditional Indian favourites, gold and real estate -- the latter by a significant margin.

Sample this: local shares, as measured by the benchmark Nifty, have risen a whopping 144 percent, outperforming even gold’s stellar run of a 129 percent gain, according to a Mint report. Property prices on average (measured by the Capital Mind All India Index) have risen 63 percent in the same year.

It needs to be pointed out that any such analysis tends to suffer from sampling bias (the start of the immediate past five-year period coincides with the global bottoming-out of stocks in March 2009).

But the move in stocks underlines two facts: that stocks tend to perform in spurts, and that investors -- often blinded by their inherent volatility, which leads them to try and ‘time’ -- would do well to remind themselves that if they treat their investments equally, stocks are always a good option.

What do we mean by treating investments equally? That stocks should be looked upon as a pure long-term investment, just like gold and realty are. How often do we see a world in which investors are flipping houses or frequently buying and selling gold the way they do with stocks?

It doesn’t help that unlike the real estate or the gold industry, there is an active finance industry that promotes “trading” by the hands of novices thanks to their frequent calls to action -- it is a known fact that for brokerages earn profits depending on the amount of trading that takes place.

This even as a wide body of research exists questioning the success of short-term analyst “calls” -- even as frequent trading adds to liquidity in the market and promotes “efficiency”.

While financial planners often point to the fact that stocks, or stock funds, should be held for the long term, the lack of a clear definition has often confounded investors.

A recent analysis by the Mint’s Kayezad Adajania showed that when average holding period reaches eight years, the Sensex (including dividends) on average returned a healthy 12 percent annualized, with the minimum return being about 7 percent.

But egged on by the industry, the average holding period for stocks, in the US at least, has come down from eight years in the 1960s to about 6 months now.

While such data is not available for Indian stocks, it won’t be surprising if a similar story exists here too.

The recent outperformance by stocks has sparked rising investor interest in the asset class  -- domestic equity mutual funds are of late witnessing inflows after a multi-month run of outflows recently, and more and more print and electronic media space is being devoted to discuss the market’s performance -- it is merely a repeat of investors chasing recent performance (gold funds are facing redemptions after a lackluster year or two) rather than a signal of understanding how stocks should be treated.