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What you must not do as an equity investor

It is easy to follow good investing behaviour when the going is good and markets are in a bull phase. However, when things are trending downwards, behaviour starts to waiver. Stop yourself from making these mistakes when equity markets are undergoing a weak phase.

There is a lot to be said about how long-term equity investors need to be disciplined and patient. Those are the two most critical behaviour traits that you should possess, without which your investments are at risk.

It is easy to follow good investing behaviour when the going is good and markets are in a bull phase. However, when things are trending downwards, behaviour starts to waiver. Stop yourself from making these mistakes when equity markets are undergoing a weak phase. 

1. Expecting annual performance from equity

Equity investments are best suited for the long term. What this means is that you have to buy and remain invested over a period of 7 years or more. However, post investment, many investors look at stock returns and fund performance every year to see if their investment did better than the benchmark and against a defined peer set.

While this is fine if you just want to be aware, do not act or react to the outcome of such scrutiny. Looking at annual performance will tell you very little about how the investment will serve your long-term goals. Don’t expect your equity investment to deliver positive return every year or for that matter to beat other equity portfolios and stock returns every year. 

Comparing your good return years with fixed deposit interest is just as unfair as comparing negative returns for a period. The purpose of equity investments is to create long term wealth by growing value over many years, whereas, the purpose of a fixed deposit is to give you safe and regular income.

2. Expecting equity to outperform fixed deposits every year 

A fixed deposit or for that matter any fixed income investment like a debenture or provident fund, works to return a fixed amount each year. Equity investments on the other hand are not linear. This means there will be good returns in some year and poor returns in others, even negative returns.

Comparing your good return years with fixed deposit interest is just as unfair as comparing negative returns for a period. The purpose of equity investments is to create long term wealth by growing value over many years, whereas, the purpose of a fixed deposit is to give you safe and regular income.

3. Craving change when markets are chaotic

The equity market itself is influenced by many external factors and macro conditions on a daily basis. As a result, stock prices move up and down every day. However, this does not mean that the worth of the underlying company changes daily. The ability of a company to generate earnings can continue for months and years – despite the daily change in its stock price. You may feel like you too should follow the chaos in markets and change allocation based on short term value.

Doing too much will destroy value and not create it. Remember, business fortunes don’t change overnight and similarly, your financial goals don’t change overnight. Stick to your allocation and do less not more in times of uncertainty. Instead, from the very beginning focus on the quality of your investment and investment advice that you absorb.

It is not easy to witness a daily fall in the value of your equity investment. It will be even harder to digest if you redeem now at this low value and miss out on the gains when the equity investment cycle turns positive. 


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