This article breaks down the misconceptions about stock investing and provides actionable advice on why you should avoid individual stocks and invest for the long term.
Many investors, especially those without a lot of experience with the stock market, have views about the market which are not correct.
We have discussed one here: Why the stock market in India is not a casino?.
This article will discuss another common misconception that you will always lose money in the stock market.
There are many ways of losing money in the stock market:
However, even in these situations where money is lost in the stock market, there are two rules that, based on historical data, show that you will very unlikely lose money in the stock market.
Related:
5 mistakes that investors make with their stock portfolios
A 2017 study “Do Stocks Outperform Treasury Bills?” by Hendrik Bessembinder, published in the Journal of Financial Economics, analysed the lifetime returns of U.S. common stocks from 1926 onwards.
There are two takeaways from this study:
These two results, which effectively say that:
Every long-term investor in individual stocks sincerely believes in three things:
On the flip side, they also believe, implicitly in some cases:
As we have argued before, when investing in individual stocks, you are running a single-person mutual fund. This implies three things:
Buy the stock market index via passive index mutual funds
A lot of stock investors will scoff at this point. This article is not for them.
Instead, this article argues that:
There is already enough evidence that active mutual funds, including the one-person funds run by individual investors, do not beat the market index.
This point is made regularly in the S&P SPIVA report (which now has an Indian version as well) and also in our report on the Indian market: Arthgyaan India Active Fund Scorecard (Dec-2023)
Note: It is important to mention that one common example that is given every time index performances over long periods are mentioned is the performance of the Japanese Nikkei 225 index after the Black Monday crash of 1987 where the index value in 1989 was only recently reached in 2024 as the chart below shows.
However, it is important to note that the Nikkei 225 Total Returns Index, which includes reinvested dividends has given a modest 1.56% extra returns, per year, over the price index for the last 35 years.
Given Japanese inflation values of either negative or less than 1%, this is not as bad as a total return as a cursory view of the index returns will show.
Related:
Market Study: Did Japanese Stock Market Investors Really Not Make Any Money Since the Late 1980s
Stock market returns converge towards the average as time passes for both positive and negative values.
We have used data for the Nifty 50 index data and included dividends i.e. the Nifty 50 Total Returns Index from 1996 onwards. We have used this data to calculate returns over 1Y, 2Y, 3Y, 5Y (for the short-term) and 7Y onwards for the long-term and calculated both lump sum and (monthly) SIP returns.
The rules explained in the article are:
We need a method to divide your entire portfolio into these 12 categories (3 buckets: equity/debt/cash and 4 time-based groups) and allocate the correct amount of mutual funds to each.
The Arthgyaan goal-based investing calculator shows you how to do this by making it easy to see how much of your existing portfolio should go into each bucket and year-based cell as shown in the image above. The detailed concept is explained here: Which are the Best Mutual Fund Categories for every Investment Horizon?
We will use Google sheets to create a simple calculator for this calculation. There is a link to download a pre-filled copy of the Google sheet via the button below.
Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.
This table is in the “goals” tab on the right.
This way you can use the learnings from both histories, i.e. Hendrik Bessembinder’s paper, and the simple observations that over the long-term, the stock market index has made more money than it has lost.
1. Email me with any questions.
2. Use our goal-based investing template to prepare a financial plan for yourself.Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.
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More posts...Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
This post titled How to Avoid Losing Money in Indian Stocks: 2 Proven Strategies for Long-Term Success first appeared on 06 Oct 2024 at https://arthgyaan.com
