BackThe slow cook of equity
Equity investing has its own rules and unless you follow them, you will lose
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It always amazes me. The confidence with which people make such definitive statements. Gold is always the best investment. You can’t lose on real estate. Stocks are a gamble. People like me, who take a middle-of-the-road approach and talk of diversification, were hooted down when gold was the best performing asset class two years ago or when people swapped their multi-bagger real estate stories. To talk of investing in equity in the go-go years of gold and real estate, when equity was down, was to invite derision and disbelief. But now that gold is down, real estate is in decline (held up only by a frozen market), fixed deposit (FD) rates are down and equity is moving sideways, it is a good time for some non-exuberant talk. If the chatter on WhatsApp groups (when they tire of recycling the same pathetic jokes) is any indication, people are willing to listen to sense. One forward that has come on almost all of my WhatsApp groups is the one titled “Real estate: the fall has just begun". I traced the forward to a blog by certified financial planner D. Muthukrishnan of Wise Wealth Advisors, https://mintne.ws/1MhqzZZ . Very sensible stuff; do read. And remember to build in the tax impact on the final average return numbers given in the blog of the FD average being inflation plus 1%, gold giving inflation plus 1.5%, real estate inflation plus 3% and equity, inflation plus 7%.
I would use this time of low exuberance in every asset class to understand some basics about investing. First, unless you can time the market (and some get lucky of entering a bull phase at its start, but credit it to their own smartness rather than pure luck), hitch your expectations to the average return numbers mentioned above. Greed gets us to lose more money than it earns. Manage expectations of what an investment can do for you. If you really want a multi-bagger that turns 1 into 10,000, start your own company. Don’t expect to ride somebody else’s hard work to make those kind of returns. Manage your greed. Remember these are “average", and individual experience will vary depending on what you bought.
Second, don’t choose a current flavour-of-the year asset class and bet your entire future on it; have different products in your portfolio to do specific things. Fixed-return products for specific near-term needs, insurance for protection from unexpected bad events, real estate for a roof over your head, gold for… um because Indians like it and need to hold some, and equity for growth and wealth creation.
Third, you have no option but to invest in the stock market if you want inflation-plus returns that are low-cost to hold, liquid and have low buying and selling costs.
The toughest learning is the one around equity as it is misunderstood to be a gamble rather than a slow builder of wealth. Equity investing has its own rules and unless you follow them, you will lose. What are these?
One, when investing in the stock market, give it the same patience you give real estate—a good equity portfolio needs five years of patience, 10 years to see consistent returns, but actually will slow-cook over 15-20 years.
Two, remember that your risk is choosing poor products and finding out after 15 years that your fund manager malfunctioned. While others went far ahead, yours did worse than the average product in the market.
Three, if you find yourself frozen while choosing out of the equity products in the market—direct stocks, market-linked products such as unit-linked insurance plans (Ulips) and mutual funds—and don’t want to take the risk of choosing a fund manager, go with an exchange-traded fund (ETF) linked to a broad market index and a mid-cap index. This is the safest way to get the average market returns without taking the fund manager risk. You will do worse than the best-managed funds, but better than the worst-managed funds. ETFs also have wafer-thin costs now that the Employees’ Provident Fund Organisation (EPFO) money into the SBI Mutual Fund ETFs has reduced overall costs for the market. An average equity fund costs you 2% a year and the cheapest ETF costs 0.03%. Over a 30-year period, this difference will be significant if your managed fund does not beat the index by more than the cost difference.
Four, do not invest in any product that locks you into a particular company or asset manager. What we forget is that over the long term in equity investing the risk is not of the market, but of poor fund management. This is why I do not recommend having a Ulip in your equity portfolio, despite these being competitive with mutual funds in terms of costs. A Ulip will lock you in with a particular company’s asset management and to switch out is expensive. What you want is a product where exit is possible, cheap and easy. Think of it as portability—you should be able to port your money to a better fund manager at a very tiny cost if you are unhappy with the existing one.
Five, if you want to invest in managed funds, start learning. Read through the Mint50 coverage https://bit.ly/1Kd4Mhv. Go through the Value Research data https://bit.ly/1KYChan and Morningstar ratings https://bit.ly/1TjoxZy. Take a considered decision that you can own. Not investing in equity is not an option. You may as well understand the road rules of investing.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com
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