When viewed as zcb (zero coupon bond with a 20 year duration) the share (including the mutual fund scheme with Growth option) looks like a bond that has a high credit quality, awesome liquidity, very low friction, a rising coupon and WE HAVE CHOSEN a very long time horizon. By saying that we will use a buy and hold strategy we are also eliminating the interest rate risk (in equity parlance, the short-termism) and by reinvesting the dividend (if you are valuing a share) you are making it look like a zcb. Zcb are of course easier to value. It’s a high quality high RISING yield bond. Most of us do not have a consistent 20 year investing time horizon, but by creating a bond portfolio, an annuity, or having a regular business/ salary income we can negate the mental assault by the short termism of the media. Owning this instrument can be scary as it creates short-term uncertainty. However train your brain to ignore the short term fluctuation, and you will have some advantages:
Defining the time horizon of the stock market helps overcome short-term thinking.
You stop thinking of the share market where ‘profit booking is a must’ as proposed by some stupid commentators – who do not explain, or experience the multi decade, multi generational wealth creation.
You learn that you can do annual reviews but it does not mean you need to do annual shuffling.
Rolling returns, and portfolio returns are always useful to make you more cool and level headed, as long as you do not read/ watch financial porn which we dish out regularly.
Smoothening the return curve reduces your stress even in a falling market.
Why did I pick 20 years? because it is in 1994 that many of today’s big funds were launched – so there is historical data available for a few good funds (I know this is surviroship bias, but for this valuation game, we will ignore that !).
It helps the IFA in understanding the riskiness of the share market’s short-term movements – and its virtual non effect on the long term portfolio valuation, and should help to construct a proper risk profile and asset allocation. The only way to reduce the riskiness (AKA gyrations or volatility) of the share market is to hedge it with instruments that will buffer the dips. Creating the right mix of assets with the appropriate duration is the key function of the IFA – constructing a portfolio that matches the right assets with the right time frame for many decades.
Bonds are NOT equities, and the reverse is also true. Survivor ship bias comes into play when you choose a Hdfc Top 200. Actually it was Zurich Top 200. However, lets ignore these things when we have a different outcome that we are hoping for!
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