When people talk to me about investments, I see the kind of damage that Google has done to the investor’s mind set! It is but obvious that when a person wants to invest he turns to Google and searches for ‘how to invest’ or something like that. He is nicely led by Alexa to dubious websites. He then does some selective reading, and more selective understanding and further filtered implementing !!
Let me tackle with a few such misconceptions:
- Long Term Good return = Series of Short Term Good Results: One of the biggest misconceptions in equity investing is that the shares that they have and the fund schemes that they have MUST give good long term returns which means it should give a series of short term good returns. This is not only difficult, but almost impossible. Take the case of Hdfc Equity Fund or Hdfc Top 200 fund. Both have exemplary long term track record and absolutely lousy 1, 2 and 3 year returns. Exactly in this background Morningstar.in has given them a ‘Gold’ rating. They have refused to downgrade it and in fact their article says ‘short term bad performance is not enough to reduce the rating. It is very difficult for a rational, retail investor or even his independent financial adviser to sit tight over long periods of time in a fund with sliding down performance. However, mathematically speaking, if a fund is beating its benchmark for a long period of time and meeting your objective it is a good fund. It is a call that you have to take. Knowing the track record of PJ I might stick around for about 6 more months to take a call. I might even withdraw systematically instead of withdrawing in bulk.
- Diversifying Eliminates risk: I have friends/clients who have gone by the book and invested in equity, debt, gold, and real estate in almost equal proportions, and have pathetic returns to show in their overall portfolio. Properties in Panvel, OMR, NCR, etc. have given real bad returns over the past few years – perhaps about 7% cagr if you have been lucky over the past say 5 years. However, if it was a leveraged deal (which is what it always is) the leverage MAY make this return look good. Similar stories in gold too. So the gold biscuits lying at home/ locker is no longer looking like a ‘bright’ idea anymore. ACTUALLY diversifying REDUCES risk of one asset class under performing in a particular period of time. However, if you are clear that you have a long term mentality and ability to weather the storm, equity returns are superior. Remember great wealth has been created by taking concentrated bets – whether it is a Ratan Tata, Bill Gates, or Azim Premji. Diversifying DOES NOT ELIMINATE risks, it protects profits already made (so actually reduces return too!)..
- High Risk, High Returns: People think it is their RIGHT that they SHOULD get higher returns because they are taking more risk. So they feel that they should get higher returns because their asset allocation is skewed towards equity. Well, this is true ONLY, in the very long run. Like say 15 years. If you lose patience in the 5th year..and say ‘all this is hogwash’ you will be proved wrong. You can then go all over the world and keep cribbing. Please understand HIGH RISK may lead to HIGH RETURNS, it is not HIGH RISK must lead to HIGHER RETURNS! The chances of losing money is called risk…..
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