Sumeet Vaid, Founder & CEO, Ffreedom Financial Planners

If one sits down to chart the history of the Sensex over the last 30-40 years, one would notice that everytime there is a spike in the fortunes of the market, there is a corresponding spike in the number of people who want to turn ‘investor’. Unfortunately, we execute financial decisions based on our feelings and emotions rather than hard facts or financial planning.

Long back, someone once told me, “The Sensex is a barometer of the economy’s sentiment. Its movements work in tandem with the way people think the country is going to perform.” While people do treat trading in the stock markets as a way to make easy money, it is best left to those who want to trade on a daily basis. If you are one who cannot trace the movements of the Sensex continuously 24x7, then trading is not for you.

While I do endorse investing in the markets as a part of diversifying financial portfolio, I always recommend that before one begins investing in the stock market there should be a clear identification of the goals that accompany the move. How can you meet your goal if you are not sure where you are going?

If you have ever invested in the stock markets then there are two questions I want you to ask yourself –

1.    When did you invest?

As I mentioned, most people think of investing only when the market starts moving upwards. While there are no figures to back this, I am sure that during the last phase of bull markets, when the sensex peaked above 20,000, most people did not consider investing till the index has crossed 17,000-18,000. And when they planned to enter the market, seasoned investors were looking to start booking profits.
 
2.    Who advised you on your investments?

Investing in stock markets involved understanding market fluctuations and impact of corporate actions on share price. More often than not, people start investing due to the trust that they place on their neighbor, friend, uncle or even the paanwala but not professionals who are trained to do the job. Just because someone mentions to you that it’s easy to make money in the Sensex right now, you decide to take the plunge – where it’s backed more by emotions rather than solid financial planning.   

Now, if we can for a moment step away from the mayhem and look at the market’s performance over the last three decades it might tell us a different story. In the long term, the Sensex has delivered average CAGR returns of close to 17.5-18%, which also beats the average inflation figures for the same period. In an analysis that we conducted, the returns from regular investing (or SIP) were better as compared to one time investing, over a longer period of time.

There are two broad understanding that we need to take from this data for individual investors

1. Investing in equity can be rewarding but it requires discipline to give you quantum earnings. Moreover, let your decisions be based on facts and research rather than the ‘feelings and emotions’ that people normally subscribe to.

2. And more importantly, when you are planning your personal finances, try to incorporate discipline into your complete financial plan. Just because you have surplus money today, don’t fall into the trap of looking for quick money by investing in stock markets and abandon your financial plan. If you take a long term view of your personal finances, you will be able to chart out a more secured path for yourself, one that it easier on your pocket every month and incrementally adds to your peace of mind.

Always remember the difference between savings and investments. The first is driven by emotions and the latter by goals. When you are asked to save, the arithmetic applied is that the money left in your hand, after you have deducted your expenses from your income, is savings. When one uses ‘savings’ as an investment tool there is no fixed goal driving your actions and when you need money, you immediately liquidate your investment to meet your requirement, taking you away from the benefits of long term investing.

On the other hand, investments are backed by specific goals that you have already identified for yourself. And along with your financial planner, you can create a financial plan for yourself so that you are aware about when to invest and how much to invest. Sometime back, I started by analyzing returns on an investment of Rs. 10,000 per month in Systematic Investment Plans (SIPs) in early 2000 to evaluate the power of compounding (i.e. generating earning from previously invested earnings) that we always talk about. The results were startling! With a disciplined approach over 10 years, the returns on Rs. 12 lakhs (10 years x 12 months x Rs. 10,000) on an average are valued at Rs. 48-50 lakhs today. In the case of some of the top performing fund, this valuation breached the Rs. 90 lakh mark.

While I do subscribe to the fact that financial decisions should not be directed by emotions, it would be a folly to underestimate the importance they play in our lives. I have always found that the best approach to balancing emotions and finances lies in listening to your emotions to know what you want and then listening to you head to prepare financial goals & follow them to achieve what you want. 

e-mail: Sumeet Vaid

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