Patience is considered a trade virtue and more often than not is something that is lacking in most investors.
Our parents managed money is such a way that it took care of the entire family and its needs. What did they do right? And where are we going wrong? This Father’s Day, let’s try to unravel the mystery. Maybe we would find some clues hidden behind the advice, rebukes, instructions that were a part of our growing up days.
“Can we do it differently?”
“Can we do it differently”, how many times have we heard our fathers ask us that question? What he really meant was there could be multiple ways to fulfil our dreams, what’s important is to choose the most practical one. When a certified course was out of budget, he advised us to take a friend’s help (and books) and learn on our own for the optional basic module, and go for the certification for the advanced module later.
Let’s take the case of a high-end mobile phone that costs a whopping Rs 1 lakh. Many of us wanting to own one but with not-so-deep-pockets might opt to take the equated monthly instalments (EMI) route to pay for the phone. Let’s assess an EMI option (purely representative) from a bank:
|Loan Amount (Rs)||1,00,000|
|EMI (in Rs)||6,238|
|Total outflow (in Rs)||1,12,293|
Many of us might be ready to take the plunge as a monthly outflow of Rs 6,238 may not look as daunting as paying Rs 1 lakh in one go. However, if we recall dad’s advice and evaluate our other options, we could find that EMIs need not be the only means. If we are willing to postpone the purchase for a similar tenure, there could be other ways to fund the phone without paying the additional Rs 12,293 that would go towards the interest.
What we would need to do is speak with a financial advisor and consider systematically investing the same EMI amount monthly in mutual funds. Depending on the advice, for an 18-month investment period, we may choose a slightly conservative approach by allocating funds in multiple asset classes that match the risk tolerance. A hybrid mutual fund comprising 35 percent equity and 65 percent debt, expecting an average return of 9.5 percent, could be a good pick.
Our position at the end of the 18th month would be:
|Invested amount (Rs)||1,12,284|
|Value of investment (Rs)||1,20,170|
We find that while our outflow has been similar as with the EMI option, we have been able to generate a surplus of Rs 7,886 on the same. Now we have at our disposal Rs 120,170 with which to buy the phone. In the interim if the prices have gone up or a newer model is available at 20 percent higher price, we can easily afford the same.
“Be patient and it will happen soon!”
We want everything to happen at once – we want to qualify for the football tournament on the first day of the league matches, we want to get a senior position in our organisation on the first day of our job. These desires can be rather frustrating. Dads always had the perfect cure for this – “Be patient and it will happen soon.”
The same applies for our investments. Patience is considered a trade virtue and more often than not is something that is lacking in most investors. Erratic behaviour is responsible for limiting the potential of our portfolio. Wealth creation is a lifelong venture and doesn’t happen in one stock market cycle.
Equity markets have been able to create enormous wealth for the long term investor. Someone who had invested Rs 1 lakh in 1990 would be sitting pretty with a corpus of Rs 3,847,807 in May 2018 (a compounded annual growth rate of about 14 percent in 28 years). Patience does pay.
“Control your emotions”
Another significant lesson dads have taught us is to control our emotions. Winning three matches in a row could have taken us on cloud nine, but dad said, “it’s not a big deal, keep going.” And losing three matches could have pushed us into depression, but dad still said, “it’s not a big deal, keep going.”
This is something that needs to be replicated while investing. The idea is not to get swayed by the sharp corrections (up or down) in the market. Staying long in the market is the key to healthy returns. It’s also important not to get anxious and take ill-advised steps when the market is sliding.
The demonetisation movement by the Indian government and the US election results in 2016 made the Nifty slip 229.45 points on November 11 to close at 8,296.30, the lowest in over four months. An individual who started a SIP of Rs 1,000 in March 2015 and continued irrespective of the momentary changes in the market, would have accumulated Rs 50,089 as of May 11, 2018 (with total invested amount of Rs 39,000), giving a yield of 16.40 percent%. The key here is to stay invested even during major events and ride out the movement in the market.
Dad’s simple teachings can solve greater complexities but are often forgotten in our fast-changing lives. These childhood lessons from him may not have made much sense then, but they do now. It’s worth trying what he taught for what we want. So, let’s go ahead and make the most of it.