Last week we discussed what risk is and the ways and means to manage those risks. A person in life primarily has three types of goals viz. short term goals, medium term goals and long term goals. And if a person intends to accomplish his long term goals; loss of purchasing power is his biggest risk. The best tool to combat this risk are “Equities”. When I often advise people to invest in equities for their long term goals; their sudden reaction is “Equities are risky investments and they do not give returns”. Today let’s understand the myths and realities about equity investing.
1. Equities are Volatile only in short run
The most talked about reason for not investing in equities is its volatility. As quoted in the previous article, equities are unpredictable in short term but quite predictable in long run. From 1979 till 2014, a 35 year long period, sensex has delivered a return of over 17% p.a. which is very impressive. But if we analyse the yearly returns in these 35 years, sensex has given 250% return and – (45%) return as well. Quite a volatility!! But if we were to take any 15 year returns of sensex in last 35 years; it is seen that sensex has given 16% returns on an average.
2. Just because it can be liquidated; does not mean it is liquid
Financial assets offer an ease to invest and withdraw at any time and hence people weigh almost all financial assets whether debt or equity on the same scale. Equity is meant for long term goals but since it offers the ease to be withdrawn at any time (being a financial asset); often people pull money out of it even for their short term needs.
3. Past is no guarantee for the future
Would you drive your vehicle looking at the rear view mirror? Obviously not!! You will take help of rear view mirror on time to time basis but for sure most of the time you will look ahead. Similarly, investment should be done keeping in mind what can happen in future. But the problem is investors buy past and not future. Most of us invest in equities only if they have given returns in past 1-2 years. Since equities give non-linear returns and are cyclical in nature, hence invest only when past record has been bad.
4. They say what you want to hear and not what’s right
Media – whether newspaper or television makes money for itself and not for you. Just a year back in October 2013 when Indian currency depreciated from Rs. 60 per US$ to Rs. 69 per US$ – there was a hue and cry everywhere that Indian economy would collapse and what not. But just in a year the things have turned topsy-turvy. From the times when the economy was claimed to get collapsed – Sensex has given returns over 50%. In good times people (media or otherwise) would talk of only growth and development and in tough times they would only talk of collapse etc. Hence avoid taking decisions on what you hear around.
5. Equities are the best bet only for long term goals
Make sure you know where you want to reach. Invest in equities only if you have a goal which you want to accomplish over a period of 10-20-30 years. Align your investments to your financial goals to make the most out of them.
Just these 5 simple precautions can help you make fortunes while investing in equities.
