It is self evident that good investments mean good returns as well. Many people dart in a new direction randomly. Many get caught up in the latest investing fads. There are broad trends like equity and mutual fund investing and then real estate, commodities, and gold. And then there are micro-trends like going overboard on mid-caps, banking stocks, the communications sector, and infrastructure. In pursuit of the latest trend, investors churn their portfolio.
It is like, if you dig in the same spot long enough, you’ll eventually find water, goes an old saying. But many people dig in one place for a while, and then get impatient or distracted and start digging in another place, and then another. When they don’t find water in any of those, they blame their luck. It’s surprising that more people haven’t figured out the simple trick. Of course, there’s no denying the importance of choosing the best place to dig in the first place.
These are the people you find glued to the TV, watching business channels, where post-mortems and predictions are given out incessantly to viewers who wait anxiously for the latest, as if they could get the news and act on it before anyone else. But what is on the TV channels is ‘news ‘ only to the retail investor. The rest of the investing world usually not only knows about it, but has often also acted on it. The result is that retail investors are often the last to rush in, and get the empty shell, after the kernel has already been eaten by those higher up in the investing food chain.
The investing topography also has its share of whirlpools and quicksand. These feature things like rumors floated by vested interests, and often aimed at retail investors. Trusting investors follow the trail laid out for them. Retail investors are fascinated by day trading. Many investors have great faith that there exist fail-proof methods to become really rich really quick.
They underestimate the risks they take, and rely too heavily on the instincts of themselves and of others, often at the expense of plain logic. The tide of optimism exposes their gambling streak, and they end up making bets that may not be as sound as they first appeared. Fact is, it’s very difficult to predict equity markets, because there are simply too many variables involved.
For those who want to get rich fast, investing time frames are measured in days rather than years. All the talk about wealth creation over time and returns of 12-15 percent a year considered as very mild. The aggressive investor will settle for nothing less than doubling his money in six months. But the fact is that risk and return normally have a direct correlation – the higher the risk, the higher the returns. However, the chances of good returns increase while risk does not when one gives one’s investment time to perform.
When investors burn their fingers, they leap to the conclusion that investing is dangerous, and swear they will never return to it until the next fad comes along. Drifting from one investment to another without any strategy will not help anyone reach their long-term goals. It amounts to digging in too many places for water.
If there’s no strategy for achieving goals, it may never happen. Many simply chase money. But that money is required for achieving certain milestones, fulfilling aspirations and meeting goals. Making money is not just chasing money, and letting oneself be led in any direction that seems appropriate at a given moment, will render the whole exercise futile.
Investors need to work with goals in mind, and work towards reaching them in the appropriate time frame, which is what financial planning is all about. There is no compelling reason to arbitrarily aim for some high threshold of return say 40 percent a year which will only drive the investors towards riskier options. Responsible investments made over a period help in achieving goals, even if they give modest returns. Investors need to give them time. Like everything else in life, it takes time for an investment to bear fruit.
Less is more. There’s no need to keep moving money around. If invested in good options in a diversified manner, just let it be. That way you don’t have to constantly look around for options to shift to.
Remember, if something seems too good to be true, it probably is. Schemes which promise stratospheric returns deserve skepticism.
So do those who claim to be sure about which way the stock market will turn, which stock will do well this year, and the like. When someone is that sure, take their views with a proportionately big pinch of salt.
For knowing where to dig for water, people would consult a hydrologist, engineer, or some other professional. It should not be different with money and in the same way find a knowledgeable consultant you can trust, who will guide responsibly.