Mixing short-term plans with long-term goals spells disaster

Written by Brijesh Damodaran | Updated: Feb 28 2012, 06:26am hrs
Slow and steady wins the race when was the last time you heard this This sounds such a clich, but in wealth generation, this still holds true. Just like a person grows from birth to a toddler to the teens and, then, manhood wealth creation is also a gradual process. There could be instances where one creates wealth overnight, but they are more of an aberration. While getting rich overnight is a common aspiration, at the end of the day, its the person with patience who takes the cake.

Let me share two instances where the above scenarios were played out. Amit and Vinay are dear friends. But what separates them is that while Amit weighs all options and has definite plans while investing, Vinay is the one who likes to time the market. They both began their wealth generation journey in 2003. You will recollect that from 2003 till beginning of early 2008, the stock and real estate markets only moved one direction up. The majority of stock and real estate investments had delivered multiple returns, at times in high triple digits. However, the real story began in 2008.

Being a prudent investor, Amit believes in a prudent asset allocation methodology and invests with a goal and a time horizon in mind. As the stock prices started moving up, he slowly began to reallocate part of the equity gains to debt funds, in line with the asset allocation process. And when the markets started falling, he went overweight on debt and reduced his equity exposure and reasoned that carrying out investments through an SIP would generate more returns in a falling market. But he was not sure, as he had only experienced the markets going up.

He started investing through the SIP route, as per his asset allocation methodology. In the initial few months of investing, his portfolio was in the red. However, since he was clear about his goal and time horizon, he was not bothered. Slowly, as the stock markets started going up once again from mid-2009, his investments started reflecting gains. As he had invested at lower levels, the returns were in the high double digits and his disciplined investing paid off. This was again reaffirmed in 2011, when the markets kept going down. Amit again stuck to his asset allocation and SIP strategy and the move is giving higher returns.

On the other hand, Vinay wants to time the market. He likes the momentum and action that comes with investing. For 2003-2008, though this strategy worked on and off as he made some gains, many a time his gains were negated by losses and again recouped with gains. In all this activity, Vinays stress level had also increased. In 2008, with every dip in the market, he took riskier bets and the losses never recovered, resulting in a huge debt. And when the markets recovered in 2009, Vinay could not take advantage of it as his finances were too stressed.

Investing is not only a numbers game, it is more of an emotional and psychological experience. You need to have a definite goal and a definite time horizon while investing. Never mix short-term investing plans with long-term plans. Importantly, you should have the patience and time to accept volatility.

So, as the Union Budget draws near, many investors will analyse the potential gainers and losers. There will be investors who would want to bet and make some quick money. However, in the longer run, the gains even out. Invest the way you would when you want to buy your favourite car by checking the make, mileage, driving pleasure, etc. Before investing in a company, understand its growth prospects, profitability, management and corporate governance issues. Investing is a pleasure and if you follow what Amit did, you will be a gainer in the long run.

The writer is founder and managing partner of Zeus WealthWays LLP.