Wednesday, March 11, 2009

Investors' dilemma

Olga Tellis' columns (by the way, I've always wondered about this: what's a Russian doing, writing finance columns for Deccan Chronicle?) usually make a lot of sense, but I don't agree with this:
A study of asset class-wise returns between 1998 and October 2008 by Fidelity International shows that equity has out-performed all other asset classes, followed by gold, fixed deposits and lastly, gilt.

But one has to have a long term horizon of seven to 10 years.
Tell that to an investor in the Japanese stock market: the Nikkei, after reaching an all-time high of 38,957.44 on December 29, 1989, is currently languishing at 7,376.12. An investor with a time frame of say, 19 years, would be really sore from all the ass-reaming.

She continues:
For an individual, it is difficult to time the market, namely to buy at the lowest price and sell it at the highest.

One has to know one's risk and reward profile and invest accordingly.

That is why it is better to go through the mutual fund route.

Many mutual funds may be performing badly in the present scenario, but it is not true of all mutual funds.

There are several who are doing well and giving good returns even in this scenario.
A quick glance at the financial pages shows that there are approximately 57,483 mutual funds to choose from, run by fund managers with varying levels of competence. In what way is this better than choosing from an even larger list of individual company stocks? Also, unless a mutual fund is able to short stocks, I do not understand how it can give positive returns in a bear market; it's not a hedge fund, after all.

The more and more I think about the whole investing thing, I can't help but come to these conclusions:
  1. Investing your money is not a way to become rich. Your aim should be two-fold: a) ensure that you don't lose your principal and b) beat inflation. A regular saving habit [putting your money in rock solid investments (and no, I don't mean mutual funds or stocks)], coupled with the under-appreciated magic of compound interest, will take you a long way.

  2. Earn your money by the sweat of your brow, not by clever, get-rich-quick schemes.
If you feel that this advice does not hold good, and inflation is still going to screw you over, blame the government for its deficit financing policies and printing presses (I know, this is not a solution; but hey, there's always Kaun Banega Crorepati).