What to do when my Investments go up or down ?
We have spoken to a whole lot of people and were surprised to notice the same mentality among most of the them. What is that mentality ?
Before we answer that question, Please choose one of the 2 options for each of the questions below – (take a paper and write “a” or “b” whatever your answer is)
Q1. If the Stock market investments you make fall regularly will you increase your investments ?
Q2. If the Stock market investments you make rise regularly will you increase your investments ?
Q3. If the price of Gold fell regularly will you buy more Gold ?
Q4. If the price of Gold rises regularly will you buy more Gold ?
In this weeks’s blog, we are will try to change this mentality as this is a BIG hindrance in the journey of wealth creation.
Firstly let us understand below facts –
- Equities perpetually do not go up or down.
- Equities “DO NOTHING” for long periods of time, only 20% of the time they move up or down. Rest of the times, they “Do NOTHING”. They more or less remain in same place.
- Equities will go up only if earnings go up.
Now going back to the answers of the above question, we believe most of the readers would have chosen option A for the question 1 and 2. (Those who chose option B for both the questions, Please comment below your logic before proceeding to read). Since we don’t consider gold as an investment, we will avoid talking about it.
Scenario 1 –
If the Stock market investments I make rise regularly Yes, I will increase my investments
Assume Mr Joe invests Rs 5k every month and markets have gone up regularly for 3 years each year giving you 15% returns. So his investment of 1,80,000 will be worth Rs 2,24,000 earning him a handsome profit for Rs 44,000. Mr Joe invested just to see how markets perform and whether actually markets will give you any returns. Now at the end of 3 years, since he has made good money, Mr Joe is confident that markets will make you money. Since Joe did not read this blog, he remains an average Joe and will now increase his investments. He does not know fact# 1 above which is “Equities perpetually do not go up or down“
Lets see what happens now –
Remember Fact#1, market does not go up perpetually. So now it starts correcting. But Joe just increased his investments and so he will take a bigger loss since he increased his investments.
Assume that Markets correct 20% meaning the prices fall by 20%.
What happens –
Being Where Joe is, We are sure at the end of 6 years, Joe will realize that Equity investing is worthless and will leave the markets for good, never to return ever after. Another “Would be” wealthy man lost!
In reality What should you do ?
- Whenever your investments have made handsome returns in near past(past 3 Years), Do not increase your investments significantly.
- Wait for the markets to correct, for every 5% fall, increase investment by 5%. upto until 20%.
- Whenever your investment have not made your significant money, Plan to increase your investments gradually. Ideally by 5% every 6 months until you increase it by 20%.
- Do not get disappointed when stocks don’t perform, wait for the earnings to catch up (fact# 3)
- Do not get excited when the markets have rewarded you handsomely, gear up for some correction.
- Never Invest with out a goal. Goal based investing helps you to get in and get out of markets to your advantage.