Everywhere you go, you hear of long term investing into equities. Mutual Funds are always pushing their schemes at you, market icons are holding forth all the time and preaching is always about long term. So, it has become a fixity for the market- money is made over the long term.
No dispute. The efflux of time rights many wrongs. The power of compounding kicks in. Fortuitous events happen. We see the indices on an upward path over the years and are convinced with all of these that the adage is indeed true. A look at the long term Nifty chart (see chart 1), shows us that except for some periodic dips the indices have maintained a more or less linear upwardly phased path. Looking at this chart gives us confirmatory evidence that the long term investing is indeed profitable. All one has to do is to buy and sit tight on the investment and wait for it to come thru after some years.
All good so far. Buying something is probably the easiest part. There are enough “sources” around to tell us what to buy. The trouble really is the holding tight part. All of us think that we shall be able to do it. After all, we tell ourselves, we are holding “good” stocks that are “fundamentally strong” and bound to reward over the long term.
What we don’t reckon with is the Volatility in the returns. While statistics like 15% CAGR give us a feeling that the Nifty will give us a smooth 15% return year after year or some other statistic like Nifty moved from 1000 to 10000, a growth of 10x in the past so many years, conveys to us some multibagger visions, no one is quite prepared to handle the way these things actually happen.
For a dose of reality, take a look at chart 2, which shows the Annual returns of the Nifty from the year 1995 till now. What jumps out of the picture is the erratic nature of the return. Just as you were enjoying the gains of 1995, you get hit for negative returns for the next two years. While you were wondering whether to get back in, the market flips around and becomes positive return-oriented for successive years!. So you get back in the game and are enjoying what looks like a good run and before you know it, all the returns and some more was drained away in a single year(2008). You didn’t even get a chance to recover from that hit before the market sped to an astounding 75% return in 2009. This has been followed by a period of low range (relatively) returns that has also been a bit wayward. Three years of good returns (2012-14) was usurped by 2015 drop and the anemic 2016. The dramatic rise in 2017 set the pulses racing only to find 2018 turn into a damp squib!
So, what is one to make of this? The following points should sum it up. It is a list of things that we need to ACCEPT as being REALITIES OF INVESTING.