Journalism of Courage
The world is moving fast. Devices that instantly connect us with others,technology that helps us travel across boundaries in seconds,products that witness an upgrade sooner than expected. In current times,the adage Change is the only constant deserves to be tweaked to Rapid change is the only constant. Our lives have immensely benefited from these rapid advancements and breakthrough innovations that keep happening at frequent intervals.
In the world of investments though,adopting the approach of continuously churning your portfolio may not work and could in fact be counter-productive to the financial health of your investments. When it comes to investing,patience and making minimal changes to your investments can in fact add more value to your portfolio.
Let us understand the reasons why this contrarian approach works in the investment world:
A matter of time
When one invests in the stock of a company,the change in its stock price is a reflection of the growth realised by the firm. Every business requires time to grow; take the case of a brick and mortar company wherein any business expansion and therefore growth requires adding capacity through new or scaled up manufacturing facilities,warehouses etc. which obviously takes time. As such,stock valuations of such companies appreciate in line with their growth trajectory over a period of time. At times,though such companies could witness an upsurge in their stock prices due to specific events e.g. re-rating. If you are searching for companies that can grow overnight,the fact is that their rise in a short period of time is as much a possibility as their steep fall in an even shorter period of time.
You never lose in the long term
Most of us have the tendency to try and time our entry and exit into investing. While buying at the bottom and selling at the peak is everyones dream,seldom has anyone been able to achieve this feat. This is because financial markets function under a complex frame work wherein a plethora of factors influence price movements e.g. economic growth,commodity prices,fund flows,interest rate scenario etc. Trying to anticipate these multiple and inter-related factors correctly is virtually impossible. Instead if you simply hold on to your investment over a reasonable period of time,there is a high probability that you will make money.
Our analysis of 1 year rolling returns in the Sensex reveals that at any point of time in the last 10 years,if one had held on to ones investments over a 5 year period,the probability of making profit on investments would be 100 per cent as evident from the table below.
Costs of churning/trading
For most of us,realised gain is a function of sale value of investment (plus dividends) less cost of purchase. What we tend to ignore is the cost of trading or continuously churning the investment. Even though the cost per trade would be marginal,the cumulative cost of multiple trading could result in a substantial outgo. Similarly,in case of mutual funds,while there is no entry load charged,most schemes deduct 1 per cent exit load from the investment value if the same is redeemed within 1 year of purchase.
Tax matters
Income tax again plays a crucial role in the actual gains realized especially in the case of equity investments. Even though less than the personal income tax (30 per cent for the highest tax slab),equity investments attract 15 per cent capital gains tax if profits are realized within one year of investments. As such,your profits need to be far greater than 15 per cent to offset the capital gains tax when redeemed within one year of investing.
Lastly,I am reminded of an apt quote from Beverly Sills,a famous American operatic soprano There are no short cuts to any place worth going. The same applies to your investments which needs time to fructify and translate into meaningful wealth for you and your family to help you realise your financial goals.
Author is CEO,Mirae Asset Global Investments,India
