Baron Rothschild, the 18th century British nobleman and member of the Rothschild banking family, has been credited with telling investors to “buy when there’s blood in the streets.” It’s nice to ponder on such words of wisdom, but who makes the call on whether the flow of blood is sufficient to pull out your cheque book or the times should get more gory?
Buy low and sell high is another bit of wisdom thrown around. It’s true. But do you look into a crystal ball to tell you what is high and what is low and that the market will not go any higher or lower?
You may come a cropper simply because you think you can play the market on your terms and win.
When economist J M Keynes observed that “the market can stay irrational for longer than you can stay solvent” it meant that your view may ultimately prove right but you could end up losing a lot of money if you get the timing wrong.
Don’t try to time the market. No one, and we mean no one, can do that with 100% accuracy all the time. Work with the market, not against it. Stay committed for the long term and invest systematically. That way, through all the ups and downs and highs and lows, you will eventually walk away wealthier.
There is no such thing as “buy-and-forget” where investments are concerned. You need to periodically review your portfolio.
Never hang on to an investment because you have some sentimental attachment to it. Neither should you hang on to it because it would damage your pride to let it go. Say goodbye to duds and underperformers. The more you hang on to your mistakes, the greater the cost.
Have a periodic review of the funds in your portfolio and those that are consistently underperforming should be replaced. We recommend that you evaluate your portfolio at least once a year. And once you decide a fund has to go, don’t suffer from buyer’s remorse. Move on. Instead of moping, start doing your homework on the fund to replace the one being exited.
In 2009, Ralph Amendolaro, a construction worker in New York, won a lottery by playing scamster Bernard Madoff’s prison number. Madoff was the man behind the largest ponzi scheme in history. The $9 lottery won Amendolaro $1,500. His reaction on winning: “Somebody had to get a little lucky with him.” While this episode may make you smile, investing is not about luck.
If you just buy funds based on a spurt in short-term performance, or because your friend bought one, more often than not you will end up bitter and disillusioned. And worse still, poorer for your decision.
When you buy funds just because “someone” told you to with no understanding of the investment, you could end up taking a risk you really should not be. Or, you may end up with a volatile fund that your stomach may find difficult to digest.
Make an informed decision.
Investments in equity are volatile by nature. It would be futile to your long-term investment plan if you panic and sell in haste. Or, abruptly stop your systematic investment plan (SIP) because the market has sunk abysmally.
Do not make any investment decision, whether it is to buy or sell, on an impulse or rumour. If you do, you will be the one losing out.
For instance, if you started an SIP in Franklin India Bluechip for Rs 1,000/month on January 1, 1994 and continued for 18 years (ending December 31, 2011), you would have earned an annualized return of 23%. During this time, the stock market would have gone through various upheavals- the 1997 Asian financial crisis, the dot com bust, the 2001 India-Pakistan standoff that brought both sides close to war, the 9/11 terrorist attacks on the Twin Towers in New York, the global financial crisis, and the ongoing European debt debacle.
Invest in stable funds, evaluate the performance periodically, ignore the noise and don’t abandon your SIP.