BackFor exciting returns, let investing be boring
Data shows that stocks or funds that perform well over long periods are generally not the star performers in any one year
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There is a popular saying among stock traders: “There are old traders and there are bold traders, but there are no old bold traders." The same is possibly true for investing too. Best returns come from buying when the market is cheap. And then you have to basically just wait. Amid all the excitement that may or may not be happening around your pick, you have to just hold on to it—a rather uninteresting proposition.
Warren Buffett also said that the first principle of making money is to stop losing money. In other words: be focused on the downside and lower your risks.
To put it in foolproof words: don’t do anything foolish.
In practice, this could imply buying when no one else is buying, and seeing the stock or fund languish for a long time or move slowly and steadily. No one may be talking about that stock on television or in the newspapers.
Or, it could mean buying a plain vanilla equity fund regularly, which diversifies across sectors and stocks. It doesn’t feature as the top-performing fund and doesn’t get any awards. How boring!
Compare that to buying in a fast-rising market where: the hot stock that you buy is up every day, is talked about on TV, or the fund is a top performing one and its fund manager’s pictures are splashed all across newspapers. All very exciting.
If history is any guide, then what is exciting now can be terrifying later. What goes up on an escalator, usually comes down in an elevator. Data shows that stocks or funds that perform well over long periods are generally not the star performers in any one year.
In case of equity funds, only one out of the top 3 equity funds for the past 10 years are among the top 10 performers in any of the calendar years. In fact, that fund was among the top 10 only in two out of 10 years.
Interestingly, the reverse is also true. Only one of the worst performing funds over 10 years is also the worst performing in 4 calendar years.
So, looking at recent performance can be misleading. Funds that do well in the long term, rely more on consistency than on big hits. So, how do you make your portfolio boring? Here’s how.
Don’t make it complicated
Invest only in those companies or products that you can understand easily. It should be clear to you what the company does. If you buy a mutual fund, you should understand the fund’s philosophy.
If your adviser needs a multimedia presentation or a complex flowchart to explain it, the product is best avoided. In the recent past, fees (read commissions) on many traditional (read simple) products have declined and advisers (read distributors) are incentivised to sell ‘alternate’ investment or exotic products. These products claim one or more of the following: yield high returns, protect your downside, and invest in the hottest sectors or private companies of the day. Follow this simple rule—if it sounds too good to be true, it probably is.
Don’t evaluate too often
Once you have invested ‘boringly’, don’t seek excitement by looking at your investment every day or by reacting to price movements.
It’s easier said than done these days, what with online portfolio trackers and mobile apps that give portfolio values on the fly. Imagine if bank deposits were listed on the stock exchange; they would touch new ‘all-time’ highs every single day. But in the context of your investing time frame of more than 5 years, a 2-3% movement (which would create a lot of excitement in the stock markets and beyond) will not be material.
Don’t stray away from your investment objective
Every investor has a different objective. You might want to grow wealth, while others may want to preserve capital, or achieve a financial goal. It is important to evaluate your portfolio with regard your objective and not in the context of market performance.
Don’t churn too often
As I mentioned above, recent performance can possibly be the worst parameter to make a portfolio decision because high and low performances don’t last for long. But sadly, that seems to be the most talked-about topic in any portfolio review, maybe because there is not much else to talk about. So, keep your portfolio review meetings or calls short. And unless there is a material change in your asset allocation or your objectives, do not add or subtract products.
Don’t diversify too much
Many investors add new products believing they are lowering the risk by diversifying more. While this might be true for direct stocks, it can work against you while investing in mutual funds.
A diversified equity fund invests in 50-60 stocks. So, if you have five funds in your portfolio, you could end up owning 150-200 stocks, which could be almost 90% of the total market capitalisation. You can’t possibly lower risk by adding another fund of 50 stocks.
The above steps may appear to be more a list of don’ts than dos. Investing is one area where inaction pays more than action. Stay away from the excitement, be a bore and you should do okay. Yawn.
Atul Rastogi is an investment adviser and founder of Ardawealth.com.
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