When I started investing in capital markets while in college and a few years after, I went through the same cycle that many investors go through – the thrill of wanting to make I quick and big. I walked the whole path from penny-stocks which was a thrill ride with ultimate crash, to oft-prompted value investing, which I realised is for investors who not only understand the ins and outs of that business but they are willing to ride the ups and downs for decades to come given the conviction of their research and understanding of the business without losing much sleep. Neither of these strategies worked for an individual investor like me.
A few years went into me trying to time the market with stocks my research indicated to be absolute winners – trying to get in when the stock price is low and thinking that it’ll never go any lower then present and trying to sell it at higher thinking that the stock is now inflated with factor outside of anyone’s control, realising soon about how much upside I let go off by getting out of a position too early. I did what most investors do – rejoiced mightily on the trades that made me profit while completely ignoring the lost trades. That made me an ‘astute investor’ as most trades in my head were profitable.
In 2017, I read a document on www.dimensional.com, which introduced me to the data that showed why “markets work and predictions don’t”,”the science of investing”. It initially looked like it’ll be time consuming and analytical that would need an analytical mind to understand. It was a lot of data for sure, but I exposed me to the most simple investing strategy I had come across. It was the best set of investing advice I have gotten the data showed:
- Markets are the most efficient way of pricing assets – If we consider capital market as huge auction houses, the assets are automatically priced at a point at which buyer is willing to pay and seller is willing to sell. with over $400B worth of transactions/day taking place globally. That’s enough transactions to drive efficient pricing of those assets.
- Discipline and effect of compounding over large period of time are the most effective way to grow wealth – Over the last 80 years S&P500 equivalents has grown at an average of 8-10% per annum. Using the rule of 72, that takes about 8 years to 2x your investments. NOT BAD ey. I we see that stock market as a quick-buck generator, we are probably in the wrong business – that’s what casinos are for. As Warren Buffett so eloquently puts it ‘if you’re not willing to own a stock for 10 years don’t even think about owning it for 10 minutes’.
- Risk and returns are always related – While short- term inefficiencies in the market may allow you to get higher returns, whenever you want a longer-term returns you have to take on higher risks. You want lower risk towards market? Tilt towards fixed-income assets. if you want high rate of return, tilt towards small and under-valued companies. You cannot invest in low risk asset and expect a higher return, it just doesn’t work. It’s like VW Golf(www.volkswagen.com) and expecting is to out-race Formula1(www.formula1.com). It simply just doesn’t work.
- Diversification is key – Holding one Stock in your portfolio exposes you to the risk of that one stock and the market. Holding 10+ stocks in different sectors allows you to cancel out single stock risks and only exposes you to market risk. If you are invested even more broadly over the market segments, you can sleep like a baby.
- Costs matters – A 2.00% expense ratio on a mutual fund can eat away nearly a third of your returns over the period of 30 years. Look for low cost ETF’s that tracks large segments of the market or entire indices like S&P500, VTSAX or ASX100, and let it grow.
- Always remain invested – Analysts and some of the best-of-class fund managers have not beaten the market consistently in last 6-8 years in a row by timing it, so don’t try the same and expect different result.
These are broadly the set of investment advice I got from Dimensional which I have received as they shaped my entire investment style and performance, while allowing me to sleep in peace and not spend every waking moment glued to channel and blogs to find my next trade.
Since then to myself, my friends and my family my opinion about investing has been “the best time to get started in equity market might have been at some particular time in past. But the next best Time to start is TODAY”. IGNORE THE NOISE AND BELIEVE IN THE MARKET.
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