Are investors refusing to graduate beyond the basics?

Most investors wish to live in a certain “la la land” where they want a path that would lead to success. They want to hear what they want to and settle down with convenient truths. It is a refusal to graduate beyond the “basics” and confront cold reality. This means leaving the future of their investments and goals to chance. We need to do better.

Announcement: A new seminar is available: How to construct a long-term investment portfolio – a guide for beginners. You can sign up via this form. This is meant for absolute newbies to start investing in the right way, asking the right questions and not make the mistake of choosing products in the very first step and repent later!

When we discussed the power of compounding and how by construction it is absent in any capital market-linked instrument, in particular, equity (because long-term returns can be, has been, negative) –  Don’t get fooled: Mutual funds have no compounding benefit! – there was quite a bit of criticism – from both investors and advisors.

From “advisors”, it is understandable because they do not know how to sell mutual funds if we take out the “8th wonder”. It was particularly surprising to find investors in denial in spite of hard evidence like Ten-year Nifty SIP returns have reduced by almost 50% (this was in Jan 2020 before the crash!)

It is then I realised that most investors want to start a few SIPs “for the long term” and hope it all works out fine. Goal planning – absent. Reasonable return expectation – absent. An asset allocation that is mindful of goals risk profile – absent. Strategy to reduce risk – absent.  Investors do and want to do no more than what the mutual fund industry wants them to do. Start a SIP and hope.

Edward Gibbon, an English historian and writer, was popularized by the Nobel Laureate and physics teacher extraordinaire, Richard Feynman in his set of lectures with this quote that has often troubled me.

the power of instruction is seldom of much efficacy, except in those happy dispositions where it is almost superfluous – Edward Gibbon.

Gibbon had noted that most people only relish content if they are already familiar with it. Show them something new and it will only get through to a fraction. In other words, most people – investors in this context – refuse to graduate beyond the basics.

They are happy to consume content (incl mine) that would never teach them anything new. Financial news is polluted by quotes and views from sales guys, insurance and AMC honchos so much that a daily dose is enough to believe the topic of risk is “optional”

I wanted to title this piece, Are investors & advisors refusing to graduate beyond the basics?. Then realised advisors need not graduate beyond the basics because they don’t need to. Financial Advisers need not be competent because most investors are not worth it!

A teacher is only as good as her students. If no student (only one is enough) pushes her, questions her, keeps her on her toes, there is no benefit in becoming better. I have a lot of respect for an advisor who wants to not only teach the client the financial planning process but also want to keep learning. Swapnil Kendhe is a shining example.

They do so because they are wired that way. Not because it is financially necessary. The fault lies with us the investors. We only want to hear what we want. We want someone to tell us, “if we keep investing this way, we will get good returns”.

We do not want to hear, “returns from an equity SIP could be no more than an SB account after 20 years” We do not want to hear, “there are no set rules in portfolio management. We need a plan, but we also need to play it by the ear and adapt. No matter what we do, the risk of not achieving our target is always there”.

We will not graduate to looking past recent returns, star ratings, reading scheme information documents and rely on paid reviews in the media. We will click on thumbnails in our YouTube feed that promise great returns from trading, best stocks, best mutual funds and be happy with the scanty cherry-picked proof. We refuse to put in the effort. We are happy to wallow in our perception of “what will work” with no desire to doubt it.

Some readers have accused freefincal of becoming “stale” and saying the same thing over and over again. This is true. I make no claim of being a “teacher” of anything (incl physics) but for want of a better analogy, if you stay in the same class, the syllabus will not be different each year. The same syllabus is for new readers, not you.

Think of it from my position: As an enterprise, the goal of the site is to reach more and more new people with time. In 2019, 1.86 million people visited the site (about 55% new). This year it is 1.75 million as on date and hopefully, it will cross last years mark. Yes, this old uncle is doing ‘ok’ in spite of the poor site design and a dozen other shortcomings on UX and SEO.

All I need to do is peddle the “basics” on rotation to get more traffic. My only integrity benchmark is to sell pragmatic basics and not happy endings. If you have gone past that,  If freefincal is not bringing anything new to you, it is time to move on. Many have.

If you wish to move past from happy endings to a realistic plan, you can begin here: Download Re-assemble e-book: A Step-by-step money management guide and then move on to Investing in mutual funds for beginners: Basic MF questions answered