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You are here : IndiaNotes >> Market Action >> About Markets

Investment behaviour and returns

Ramalingam K | Published: 15 Feb, 2012  | Source : ValueNotes.com | Follow Author | Add to my Favourites


In the last ten years, Sensex has grown at a CAGR of 17.79%. That means, if someone could have invested Rs1 lac ten years back, it could have grown to Rs5.14 lacs. In the last 10 years one third of diversified equity mutual funds have delivered a CAGR of more than 25%. That means if someone could have invested 10 years back in these mutual funds, it could have grown to Rs9.31 Lacs.

But how many investors have REALLY got these kinds of returns!

In this context knowing about the study conducted by Dalbar to determine how the investment behaviour and decisions impacted the overall investment performance would be advisable. Dalbar, Inc. is a US based leading financial services market research firm. They have done comparative study on the returns of S&P 500 Index and the returns of the investors for a 20-year period ending 31-12-10.

The study revealed the following two important facts

- The average return of the S&P 500 during this 20-year period is 9.14%.
- The average return of the equity investor during the same period is only 3.27%

When the market is delivering so much, why is that the investor is making out less? What are all the factors contributing for this gap in the market returns and the investor returns? Though the market is delivering returns, investors were not able to benefit. Why is it so? What went wrong?  It is because of the nature or character of the investor.

Agriculture is getting affected by nature, either because of excess rain or no rain.  But we found out a system to fight against this nature. We built dams. So whenever there is excess rain, dams retain water to save agriculture and whenever there is no rain, it releases water to help agriculture.

Similarly investors are supposed to find and build a dam against their nature and behaviour towards stock market investing in order to get better returns.

What are the natures or behaviours of an investor that blocks him from getting the market return?

Fear:
When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. At that point in time everyone will come with their own logic, reasoning, and statistical evidence on the chances of further losses. Fear stands for ‘False Evidence Appearing Real’.

Greed:
Most of us have a desire to acquire as much wealth as possible in the shortest amount of time.  This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term.

An investment portfolio based on ones personality
Basing investment portfolios on one’s personal likes and dislikes are the first of the powerful influences. It is like investing in cars and fancy gadgets just because you love them. Investing on shares just because you think they are smart or flashy is ambiguous, for they could sink in the long run. It is better instead to invest in profitable ventures that pay in the long run. It is true; our investment fancies make us pay a heavy price.

Follow the flock policy

The follow the flock for fear of being the black sheep policy makes you as an investor to believe in following others in the share markets. The pitfalls of group behaviour lead us to buying high and selling less.

It also leads to unbalanced investment emotions of black or white (wrong or right) with no shades of objectivity and rationality. Buying high and selling low has made many investors suffer heavy losses in the long run.

A look at positive investment behaviour:
It is good to be investment smart with humility and reasonable aspirations that makes achievement of financial goals a reality. I have never known of any high return investments that did not have high risks.

Patience over a lifetime and being able to assume stress helps in aiming for long-term positive returns and contributes to assuming less financial stress after retirement.

Positive investment behaviour requires balanced moods, one of neither elation nor panic. Neither selling in a panic due to share market positions or adverse world or country conditions is advisable, nor is a reaction of extreme financial prosperity, both can destroy a lifetime of healthy investment. A long-term investor needs to realize that neither despairing nor elation of situations in civilization proves worthy for long-term financial portfolios.

Mr Ramalingam K is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in). He can be reached at ramalingam@holisticinvestment.in.

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. The author does not accept any liability whatsoever arising from the use of any of the above contents.


About Ramalingam K
Ramalingam K is an MBA (Finance) and a Certified Financial Planner (CFP, FPSB of India), based out of Chennai. He is the founder, director and chief financial planner at Holistic Investment Planners, a financial planning and wealth management firm. He welcomes comments, feedback & queries at ramalingam@holisticinvestment.in. His website is http://holisticinvestment.in/.

The author can be reached at email id ramalingam@holisticinvestment.in

For more information, please contact media@valuenotes.co.in

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. The author does not accept any liability whatsoever arising from the use of any of the above contents.


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