June 26 (LiveMint) – We know that Rome wasn’t built in a day; and that all good things take time. Today, when everything is about instant gratification, we are not programmed to think about benefits that might accrue 20 years down the line.
The urgency to begin our personal investment journey is just not there. We accept that investing has the potential to improve our lives, yet a lack of basic investing awareness prevents us from appreciating how dramatic this transformation can be. No blueprint to show us the wonders of compounding.
Fear of the unknown and a seemingly treacherous road (risky equity markets) keeps us in the starting blocks. But the numero uno excuse holding us back is procrastination—something we are all familiar with and guilty of. More on that later.
The techniques for wealth creation are as simple as they come. As consistent as they have been. From ‘buy right, sit tight’ to ‘fill it, shut it, forget it’, the list goes on. One theme is all-pervasive—do nothing.
Do nothing and become richer than your wildest dreams. The world must be mad. How does that even work? Well, it works like this—equity markets are volatile in the short term, but they will move upwards over time. Doing nothing for 25 years can make you quite rich. Of course, you must invest first, and regularly, there’s no getting around that.
What they don’t tell you is doing nothing for long periods isn’t easy. Data suggests that over 50% HNI (high net worth individual) investors (above ₹2 lakh), are unable to remain invested for even two years. Why?
The journey of investing can be an emotional roller-coaster. And what goes up and down, sideways and backwards, in loops and hoops is the value of your money. Good luck doing nothing. When markets go up, investors make money. And when markets go up further, we make even more money.
FOMO and collective greed can drive markets up to levels where everyone around you seems to be making money hand over fist. What we hate as humans more than anything in the world is losing money. A 5-10% fall in market levels can be managed by one’s own experience and handholding by advisers. But one must also recognize that markets do have free falls of over 20% every few years. How do emotional human beings prepare for that?
Anyone who has lived through a market crash has witnessed anxiety, dismay, fear and panic as wealth starts to vanish, and losses start to mount. It’s how you react during these moments that defines what your returns will be; indeed what kind of investor you are. And it’s important to recognize that different people react to losses differently.
That’s just who we are. Many will panic seeing their wealth erode, while some may remain more zen like. In all walks of life, when things around start to look dark, our minds can entertain doomsday prophecies. During these times, experience, common sense, belief in one’s plan, everything may desert us. What is required is mental fortitude. Can you stick with your plan even in the darkest of times? Do you even have a plan?
Experienced investors value support from advisers to help them be more disciplined, thus successful investors. Another way to deal with emotional volatility is to forget about it! Don’t look at markets every day, tune out the noise and put it in a locker. If you don’t have any clue what’s happening on the outside, then it can improve your chances of staying invested and creating wealth. Alas, the proliferation of technology and social media, smart devices that are extensions of ourselves, the world just does not let us rest. Access to information is a double-edged sword.
An alternative approach that helps manage emotions is the adoption of smart beta and rule-based risk management techniques. The philosophy has its roots in probabilities and data and eliminates the behavioural aspect with regard to decision-making. Mass adoption by discerning investors is a matter of time.
In the end, long-term investing is very much like elite sport. Ultimately, the game is played between your ears. Creating significant wealth is not easy, it requires time. It requires strong mental skills. And having a good support team can add obvious value. But first and foremost, it requires you to make a beginning. Which, for most people, remains the hardest part.
Starting early allows you to receive more of life’s most valuable asset, time. It’s the hallmark of all successful investors. The challenge is that as young adults, our relationship with money is very basic. We love money, but fail to appreciate that money does not love us back. That money has no feelings or emotions, it only works if you put it to work, else it rots. The urgency to invest must exist. It’s the best present investors can give themselves.