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How to make money in the market?

How to make money in the market?

TLDR: Investor behaviour and impact on your portfolio.

How to make money in the market? I would say follow these rules

  1. Earn a good living

  2. Live within your means

  3. Save the difference

  4. Invest your savings

  5. Wealth!!

Yeah!, Simple rules right? I think most of us are capable of doing that. Or at a minimum those of us who are visiting financial blogs.

So we are done there, right? Shortest blog post ever.

As the table above shows, most investors can’t even match the performance of the index over a long term. Why is that?

It boils down to the investor behaviour and temperament.  This might be the case for equity investors. Those poorly diversified souls who directly invest in individual stocks.

But mutual fund investors are well diversified, they do not speculate and are in for the long term. So they should be doing much better that this right? - Wrong.

The churn on mutual funds is bad. It is probably not as bad as stocks as there are traders and speculators in the stock market pushing the average holding period down. But even mutual fund investors are not doing a good job.

The chart above shows some of the problem. The data is from the mutual fund association of India as of Sep 2018. The key trends from this chart

  1. Most investors more than 70% do not hold their MF for more than 2 years.

  2. 25% of investors do not hold their funds for even 6 months

As someone wise had once said

“Time in the market is more important that timing the market”

For the average investor to see any real benefits on equity funds, the compounding effect to occur this 2 years in the market is simply not enough.

I read this very insightful article in the funds India blog which covers the need to invest for the long term as shown above.

This chart show the probability of making a good return over the long term. As you can see the longer the time in the market the better.

How does this data look like for mutual funds?

Pretty interesting isn’t it? I recommend you read the two posts from the Funds India that cover this - Part 1 and Part 2

The message for retail investors is this

  1. Do your research before investing

  2. Go for companies with sound fundamentals, good management, moat and growth prospects

  3. Go with funds with established track record and good fund manager

  4. Setup your SIP / SEP (Systematic Equity Plan) as you see fit

  5. Review only annually

  6. Buy and hold

  7. Sell only if

    1. Fundamentals change

    2. Management has become corrupt or hit with scandals

    3. Moat is reduced

    4. Industry is disrupted by a new entrant or technology.

What are your thoughts?

What is your longest held stock or fund in your portfolio and how long did you hold it? Mine is Reliance NIFTY BeES ETF that i have been holding for 7.5 years.

Leave your comments below.

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10 Reasons to FIRE

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