Virtues of Long Term

We at AIMS have always believed in long term in equity investments. We have all along advocated that “time in the market is more important than timing the market.”

Equity as an asset class moves in a non-linear manner. Periods of exuberance is followed or preceded by long period of bearishness or stagnation. For example Indian equity market has been passing through a bearish/stagnation phase since January 2008; after witnessing a short period of immense bullishness.

Consider the following hypothetical example (Courtesy: Franklin Templeton Mutual Fund). However, although the example is hypothetical, the results are very much real and startling in reinforcing our belief in long term investing.

If you had invested in BSE Sensex for the last 15 (or 5475 days in all) years (period ended February 2012), had you:-

Ø  Stayed Fully invested, the returns would have been     11.12% CAGR

Ø  Missed 10 best day, the returns would have been               5.20% CAGR    

Ø  Missed 20 best days, the returns would have been             1.23% CAGR    

Ø  Missed 30 best days, the returns would have been         (-)2.22% CAGR

Miss 10 best days out of 5475 days, and your overall returns comes down to 5.20% from 11.12% CAGR. The returns turn negative if you missed 30 best days. (Statutory Warning: - Do not try to hazard a guess about which would be the best days. It may seriously impact not only your portfolio, but your overall financial health also).

Long Term Pays and pays handsomely—A study

We conducted a small study ourselves, to authenticate our belief in virtues of long term. We noted down quarterly Nifty returns starting March1995 to December 2011. Out of 68 quarters between March1995 and December 2011, there were 32 quarters with negative returns; while 36 quarters gave positive returns. The following conclusions can be inferred from the above study:-

o   There were as many quarters with negative returns as there were ones with positive returns viz: 32.

o   Of 68 quarters, there were only 4 quarters with +ve return on an overall basis. 

o   The outperformance of positive quarters was far higher than that of those with negative quarters. This explains why Nifty moved from 1182 to 4624 touching a high of 6134 on the way;

o   At a first glance, it would appear that the market should not have moved anywhere. However the fact that it made an all-time high of 6138(starting from a level of 1000) lends credence to the fact a lazy portfolio can yield the best returns as compared to an actively managed portfolio.

(The conclusion holds true more for Mutual Funds rather than stocks, since we believe that stocks unlike a Mutual Fund scheme have to be sold at one point of time.)

Conclusion:-

1. Believe in long term in words and spirit.
2. Rather than spend time and energy in trying to identify best performing schemes, select good fund houses with good past track record.
3. Performance is historical and there’s no guarantee that it will be repeated.
4. Do not try to time the market.
5. Align your investments to your life’s goals.
6. A brief bout of under performance or negative returns is not a good enough reason to move out of schemes. (Miss 10 best days out of 5475 days and your overall returns fall by roughly 65%. Eventually positive returns will play catch up.
7. Focus on portfolio of stocks viz; Mutual Funds

Happy (Long term) Investing!!!