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This article is only for those who are new to stock markets and have started investing in 2020. If that's not you, I'm afraid, this is where we bid adieu.
INVESTORS OF 2020
Congratulations! You couldn't have chosen a better time to start investing in the stock market! My heartiest congratulations are with you and I know that you're quite happy with most of your investments right now. I know this because I myself am elated because of the investments I made last year. Irrespective of 2020's overall vibe, folks who live their lives on the trading terminals between 9:30 am to 3:30 pm will cherish this year. After the initial COVID panic in March,2020 which brought down the NIFTY to 8000 levels, the market has rallied like never before and NIFTY sits comfortably above 14000 levels as of 6th Jan 2021. Now that's not the only reason I would write this letter, right? I will try to sound as humble as possible in my next sentence but I feel it'll be an effort in vain. As a somewhat experienced investor, I still might not be an expert of all the technicalities of investing, but I know how to manage my return expectations and how important it is to have the right mental state to play the long game. Did that sound arrogant? I don't know. But let's move on to the point of this letter.
Those of you who invested in stocks in 2020 for the first time must have seen returns upwards of 15/20/30/40/50/60 % since then, I would just like to tell you;
THIS IS NOT NORMAL!!!
Please don't set the expectations for your future returns based on this 'black swan' event.
In my beginning years, even I used to open SIP calculators and adjust the 'monthly investments' and CAGR (return %) at will to dream about my 100 crore corpus within 10-15 years. The SIP calculators really show us the true power of compounding. The folly during such imaginations is that since it doesn't take much to change the inputs, we easily tweak the CAGR from 10% to 12% to 15% and then to 20% or 25%. And Voila, there we have it! Our dream corpus of 100 crore right in front of us! 'Time' being the only barrier between us and the good good moolah!
The problem with this assumption is that we foolishly convince ourselves that it's just time which separates us and our dream corpus. However, It's not just time! The 'annual return' itself is a huge barrier. We foolishly convince ourselves that 15% annual return is the worst case scenario we will face and things will consistently sail smoothly.
NOW! This folly of assuming exceptionally high achievable returns will be magnified extremely for those of you who have witnessed the 2020 returns as their first returns. No other investment will seem attractive to you. People investing in safer instruments like Debt securities (come on, I had to write a finance term like securities in this kind of an article or you would've doubted my credibility) or Fixed Deposits will seem stupid to you. No doubt, equity is the best investment option for youngsters like us as we have the luxury of time by our side but the point of this letter is to let you know that equity is still an investment OPTION and not an investment POTION.
Here are a few pointers to help you realistically manage your expectations and nudge you to take the right decisions:
Do not put all your eggs in the same basket ( let me know a non cliched version of this statement in the comments please). DIVERSIFY! And keep a comfortably high amount in your bank as a cushion to fall back on, in case of unforeseen instances in life.
You're not the only intelligent person in the world, there are a lot of them around, even though it might not feel so after 2020. If you're beating the return of a benchmark index, you're doing much better than the majority!
Don't get disheartened if you don't make similar returns like you did in the last year for the next 2/3/5/10 years. You will be lucky if you consistently make more than 15% returns YoY.
If you're unhappy even with such returns because BITCOIN rallied much more than your stocks. Stock market is not for you! You'll always be unhappy because you'll always focus on your opportunity losses instead of your realized gains!
Lastly, please don't advise someone to start investing in stocks by showing them your >40% annual returns that you made last year. This is going to ruin their expectations and their financial mental health if they're unable mirror similar returns in their initial years of their financial journey.
ADIOS AMIGOS!
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