What does it take to be a successful long-term investor

Do we have what it takes to be a successful long-term investor? Join me in evaluating our behaviour with respect to some time-tested notions.

1. Long-term implies minimal short-term maintenance!

Long-term really means long-term! What is going to happen in the markets tomorrow, one week later one month later etc. do not matter as long the asset class (equity) has to grow for a country to grow.

Excuse me, but it downright immature to claim that I have not made any gains since my SIP started 6 months ago, or that Quantum mutual fund is wrong to hold cash when the market is zooming or to worry that my 1-year SIP XIRR has dropped from 34% to 23%.

Understanding the difference the risk and volatility, that is between actual loss and notions loss is not enough. We must have the maturity to remind ourselves of the difference practically every other business day.

There are no best or optimal ways of doing things in personal finance. The only question that we need to ask ourselves is: Do we know our financial comfort zone, and are we in it?2. Investing is not a race. It is ‘personal’

If by long-term investing we refer to a portfolio with sizeable equity in it, the only requirement from such a portfolio is that it should beat inflation (actual) after tax – the alpha.

Does it matter how much alpha the next person has got? All that matters is that we have enough money for our long-term needs. ‘Success’  in personal finance is a personal concept!

To say, “this much is enough”, is not a failure. It is a personal triumph.

3. The value of  an auto-pilot

The simplest way to beat inflation is by systematic investing. Whether we do it via a bank mandate (the usual SIP) or manually (regardless of market levels), there is a strong sense of accomplishment associated with putting a ‘tick mark’ against that months investment quota.

A volatile portfolio has to be monitored and managed.  However, by definition, a volatile portfolio is one associated with long-term. Therefore, such a portfolio should be allowed to grow unmonitored for at least a few  years, followed by a periodic (yearly) review.

Watched investment kettles may have trouble boiling.

4. Will timing the market work?

Any strategy can be backtested and optimized for higher returns using past data. Lower volatility is more valuable that higher returns, and there is no need to time the market for that. Diversification and periodic rebalancing will do the job with minimal effort.

Lower volatility is more valuable because  it helps lower stress. For that, I will settle for a lower return, any day.

Timing the market may work and it maybe someone’s comfort zone. That is not the point. We must develop the ability to evaluate investment strategies holistically with or without backtesting before choosing.

5. Understanding investment risk

Risk is not the same as volatility only if the investment duration is long enough for the asset class to register growth. When it comes to equity, Five  years is not long term. Seven years is not long-term. Ten years is probably long-term. Fifteen is comfortable long-term.

How can I say this? One should learn to quantify the spread in returns for different investment durations with past data: Understanding the Nature of Stock Market Returns

Is this not “past data” again? Sure it is. It is one thing to extrapolate returns and quite another to extrapolate risk. To assume that the future would be at least as volatile as the past sounds more than reasonable to me. Read more: What Return Can I Expect From Equity Over the Long-term?

6. Cut out the noise

This is probably the toughest part. It takes nerves of steel to ignore  optimised investment strategies and theories on market movements.  Trouble is, we all love information but fail to develop a processor for the same. To define noise or unwanted information, we need to be able to clearly define a signal (useful information).

Easier said that done. We must recognise that it is a market. Noise is integral to it. If people do not buy and sell based on noise, there would be no alpha. Therefore by definition if everyone became successful long-term investors, no one would really be successful. Therefore, while we let our money grow undisturbed, it is important for noise also to grow undisturbed.

7. Don’t take a holier than thou attitude

The above argument can be extended to those who think that equity investing is gambling.  “Financial literacy” is spread by salesmen to make a living. Equity investors should be happy with the low penetration of the asset class. We are able to get index-beating returns only because of that. So let us go easy on the evangelism.

8. Hero worship is of no use

Should I revere Subra because he started investing before the Sensex came into being or because his net XIRR is close to my age! Yes, of course.

However, is that reverence enough to buy and sell based on what he posts on FB! Unless I answer the questions he poses with respect to my personal situation that reverence is of no use. Becoming friends with successful investors will not make us one. If we do not know how to process information then we have only increased the noise in our ‘feed’.

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