Patient investors reap best benefits

Stock market investor and author Philip Fisher once famously said, "the stock market is filled with individuals who know the price of everything, but the value of nothing." People invest their hard earned money into investments to secure their future and ease their lifestyle yet this very investment causes them endless stress.

And yet this is all in vain as if you just have patience and don't time the market you will emerge a winner.

"Assuming you've taken care with your starting asset allocation and have selected high-quality investments to populate your portfolio, too frequent monkeying around could lead to worse results than sitting still," says Christine Benz, Morningstar's director of personal finance, advising investors to opt for a policy of benign neglect, as against frequent monitoring and rebalancing tweaks of their portfolio.

"We try to constantly stay on top of our portfolio," says Gourav Kumar, principal research analyst, FundsIndia.com. How much gains did I make today? How much is this fund returning? Which funds are outperforming the benchmarks? And so on. These are constant heartburns.

This leads us to take action. The market has fallen, should I do something with my investments? This fund has outperformed, should I invest more or should I book profits? The Sensex has been going up, is it a good time to invest? "Unfortunately, this constant hunt for the best-performing stocks and funds can potentially harm our investments more than we think," points out Kumar.

Of course, it is events that move investment options, positively or negatively.

"There are multiple events at play at all points of time (that affect your investments)," says Mayuresh Joshi, portfolio manager, Angel Broking. Economic disruptions, trade wars, inflation, wars, are the prime culprits for market changes.

And herein lies the rub. If you just stay calm, it (disruptions) all evens out!

"If one really plots the long-term earnings returns over 10-15 years, one observes that all the short/medium term disruptions that affect the market but is evened out over a longer-term horizon leading to the reflection of better earnings structure on the corporate side which reflects in index/stock and other investment stability," says Joshi.

"The advantage of long-term investing is found in the relationship between volatility and time," explains Gautam Kaila, head of investment solutions at Sharekhan by BNP Paribas. Investments held for a longer periods tend to exhibit lower volatility than those held for shorter periods. Thus, the longer you invest, the more likely you will be able to weather low market periods.

In fact there is evidence to show that if you don't panic in the long term, it all evens out.

If one were to look at the Nifty 50 moving averages (i.e. how the benchmark is performing), the lines (volatility or depressions) for longer period moving averages are flatter. This indicates that your investments will see significant volatility in the short term. "However, this will smoothen out the longer you stay invested," says Kumar.

Identically, data from the past 20 years shows that the Sensex has never given negative returns over a 7 year period while the percentage of negative returns during a 6 year period is a miniscule 0.1%. On the other hand, the average return for a 7 year period has been a whopping 14.1%.

Stark data aside; there are personal examples where staying calm has actually worked investment wise.

"Today, however, my 6 year portfolio hardly shows losses, even though there was considerable volatility when I started investing," says Kumar. Even after the fall in mid and small caps since 2018, the annualised return for Kumar's portfolio remains above 9%. "Even a market fall will not wipe out your profits once you have stayed put for a few years," says Kumar.

"The crash and the bloodbath that happened in 2008 is etched in my memory," says Joshi. With prices falling like nine pins the effort to minimise risk was getting washed away. "However adopting a patient strategy, diversifying exposure in quality names, and most of all staying patiently invested paid off in the next couple of years," notes Joshi.

Take for instance the impact of the NDA losing in the state elections late last year in Chhattisgarh, Madhya Pradesh and Rajasthan. At that point it was expected that there will not be a clear mandate in the Lok Sabha elections of May 2019. Consequently, the day the exit poll projections were announced, markets tanked by close to 2%. However, this fall didn't last very long and the market recovered the losses in just the next two trading sessions.

And yes, this panic happens across all asset classes. "When markets are in a crisis (i.e. events such as global financial crisis, oil crisis or the dotcom bubble) negative sentiments are not confined to just financial markets but also creeps across asset classes such as gold, real estate, currency, etc," says Kalia.

Thus, the advice that experts give is to do some research for your investments and then stay calm despite and downsides.

"Financial planning or building a portfolio is a critical activity and one should invest at least a few days to gather all the information and to set down one's goals to draw up a financial plan along with a portfolio plan to achieve it," says Kalia.

Your investment priorities boil to certain basic parameters such as the age of the investor, his/her risk taking ability, ability to allocate his/her investment corpus over a longer period of time etc. "It is equally important to have diversification in your investments to reduce the risk from a particular asset class," says Joshi.

It is also advisable to include your family members especially your spouse while preparing a financial plan along with your financial advisor so that they are aware of your investments in case of unforeseen eventualities or in case of emergencies when you may not be accessible (accidents, etc).

But once you have taken your investment call, stay with it.

"An investor could review their portfolio once a year, to understand the returns of his investments," says Kalia, "However, churning your portfolio every time you review it is not advisable,". The risk comes from not knowing what you are doing.

Hence, before investing, an investor must make sure he knows where he is investing. He must assess the schemes or stocks based on various parameters such as strong fundamentals, risk-adjusted ratios, past track record of the company/fund, returns vis-a-vis its peers/benchmark, AUM etc.

One must be constantly monitoring one's portfolio every three months and can rebalance only a part of the portfolio once a year, says Joshi.

Also please remember that trading also has the potential to jack up costs, both transaction and tax costs, which drag on returns.

But perhaps the best reason to keep your hands off your portfolio on a daily basis is for your own mental equilibrium. "Take a hands-off tack with your investments is to keep your stress level down," says Benz.