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Long term investing helps create life-changing wealth

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Grace Groner, an orphaned American woman with humble beginnings, worked as a secretary at the renowned Abbot Laboratories for 43 years. She invested US$ 180 to buy three shares of Abbot in 1935. She kept reinvesting the dividends without selling her shares. When she passed away in 2010, her wealth had grown to a staggering US $7 million. Grace donated the amount to her alma mater, the Lake Forest College.

Even in India, we have heard of several investors building wealth over the long term.

But how do you define ‘long-term’?

According to an article published in Reuters, the average holding period for US shares was just five and a half months in June 2020 compared to eight years during the 1950s. Though we may not have similar data for the shares listed on Indian bourses, we can safely assume there wouldn’t be much difference. Anecdotal evidence reveals that most investors have an investment horizon of a few months to less than a couple of years.

Which means they end up setting incorrect expectations. Equity investments help create unprecedented wealth only if investors take a long-term perspective. Investors have experienced long-term gains in mutual funds. Yet, they seek only speculative gains in equities.

Changing the mindset

When it comes to real estate, gold or even mutual funds, investors are comfortable with a longer time frame. We are aware of family members and friends holding properties for several years or even decades.

Do we keep tracking the value of our property on a daily or even monthly basis? But we tend to do that with the stocks we hold.

One way to overcome this hurdle is revamp the mindset. Instead of expecting quick gains within a few months, investors must remind themselves that they are investing in businesses. They must consider themselves part owners of the companies where they have taken positions.

Irrational expectations

In the last few years, we have witnessed an increase in retail investors. According to the data shared by depositories, there were 89.7 million active Demat accounts in India in March 2022 compared to 40.9 million active Demat accounts in March 2020. Every month since March 2020, we have added two-million Demat accounts.

Thanks to seamless KYC norms, ease of opening accounts, and affordable internet, leading brokerages were able to add plenty of investors. Most of these accounts were new investors and tasted the market during the Bull Run.

Several studies reveal that close to 70% of the new accounts were opened by millennials (born between 1981 and 1996) from Tier-II and Tier-III cities. Many retail investors enjoyed significant returns on their investments when NIFTY rose from ~8084 on 30th March 2020 to ~17465 on 31st March 2022.

Thanks to the attractive returns they would have made, these investors may expect similar returns every year. But they may also pull out their investments once the markets correct.

Markets are not linear

Check out the returns Nifty has delivered since April 2016.

Financial Year – NIFTY Returns
2016-17 – 19%
2017-18 – 9%
2018-19 – 14%
2019-20 – 26%
2020-21 – 78%
2021-22 – 17%

The returns are neither consistent nor linear. The average return during this span is 19%, though, in 2019-2020, NIFTY gave -26% returns. Yet, investors expect linear returns from the market. That’s why they may pull out funds when the markets turn volatile.

No need to time the market 

When you invest for the long term, you need not time the market. You don’t need to wait for the highs to sell your holdings or wait for the lows to add more.

For instance, in March 2020, NIFTY plunged to 7600. With lockdowns imposed across the globe and no clarity on how long the pandemic would last, the prophets of doom predicted the worst. Only those with tremendous conviction would have kept buying even when the markets were falling in such times. It is about how much time you spend in the market instead of timing the market.
Legendary investor Peter Lynch famously said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves”

Yet to practice long-term investing in equities

Most new investors may not know the importance of long-term investing. Despite the exponential growth in awareness about equities in the last decade, new investors or those who entered at the beginning of a Bull Run may expect attractive returns year after year.

They may also wish to speculate and look forward to attaining high returns within months or a few years at most. Although investors invest in properties or even mutual funds over the long, they seem to shy away from exhibiting similar behavior when it comes to equities.

The power of compounding comes into the picture

Imagine investing Rs 5 lakhs in a portfolio of stocks and enjoying a CAGR of 12%. If you stay for 10 years, your portfolio would be worth Rs 15.5 lakhs. But, if you stay in the market for 20 years, your portfolio would be worth Rs 48 lakhs. And if you hold on for 30 years, your portfolio would be worth Rs 1.5 crores.

So, your portfolio grows 5.1 times during the first decade, an impressive 9.6 times over two decades, and a staggering 30 times when you complete three decades.

Thanks to compounding, you can see your investment grow multifold. Unsurprisingly, Einstein referred to it as the 8th wonder of the world. Compounding is appreciated as more time passes. But only a few investors hold their equity portfolios for so long.

Hence, investors would have to ask themselves – whether they would be happy with limited returns in the short term or would want substantial returns that can create life-changing wealth over the long term.

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Disclaimer

Views expressed above are the author’s own.

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