4 Investment Myths and Tips about Alternative Assets
Yesterday, I was reading an article in a business magazine which was focusing on “Why stock markets perform, yet people don’t make money”. Another article I read a few days back was about people who lose money in different asset classes because they are a part of the herd mentality where an investor tries his best to buy a stock at the 52 week low and sell it at 52 week high and become rich overnight.
Another thing I noticed which was very apparent was that people are happy when they are able to double their money in 8-9 years in fixed deposits without knowing much about the effect of inflation. So, investors who favor alternative assets have to always plan for long term investment.
There are a plenty of books at the bookstores which will teach you about how to create wealth, trading strategies, investment strategies, but all knowledge fails when you are unable to get rid of these four investment myths associated with the four different asset classes. Alternative Assets are best when used to diversify financial portfolios.
Investment Myth 1. Equity
“I want to buy XYZ stock for long term. I am waiting for the stock to hit the bottom. I will lose money if I buy today as the markets are falling every day”
Yes, it is true that to make good money in stock markets, you have to buy at 52 week low and sell at 52 week high, but in real world just the opposite happens.
When the markets are falling, the investors fear that it is going to fall further and delay their investment decision but the markets go upwards and when the markets are heading higher, all the analysts predict much higher index targets and an investor puts his money in stock markets and loses in the end and the market hits an all time low.
The noise around us doesn’t allow us to think rationally and invest at lower levels as we look for further lower levels in the markets. When the markets are in uptrend, they believe their stock will touch lifetime high and vice versa.
Tip: Nobody can predict the market, not even Udyan Mukerjee, an anchor at CNBC TV. Try to invest in stocks or mutual funds on every dip without waiting for the lowest level as it is difficult to find the lowest point. Never invest at higher PE multiple levels of the market. Buy fundamentally food companies in parts, on every decline.
Investment Myth 2. Gold
“Gold was at Rs 18000 a year back, now it is at Rs 28000. I have got news and I am sure that gold will give excellent returns in the coming years as there is a huge demand of gold in the world and the week global markets will help the gold prices to increase.”
In books, we read that during bad economic times, Gold outperforms and is considered a hedge against inflation. But this may not be true when it comes to price history of gold. In 2008 crash, gold prices fell along with equities. In fact in 1980’s, gold gave more than 100% returns over 1979 and later on , it went crashing down. During the entire decade of 1990-2000 gold gave close to minus 50% returns.
Tip: Gold and silver are risky assets and they move up like a bubble and then burst, so beware of moves in gold or gold funds. You can give 10-15% asset allocation to gold in your portfolio, but don’t look to have 100% allocation to gold, looking at past one year returns.
Investment Myth 3. Fixed Deposits
“I am investing Rs 7000 per month in fixed deposits. This money will grow. I don’t know much but this should be enough money for my retirement needs.”
One of the biggest mistakes made by young people aged below 35 is when they invest 100% of their savings in fixed deposits. Let me tell you, fixed deposit returns are taxable as per the applicable income tax slabs. So fixed deposits tax adjusted returns comes at around 6-7%. At 7% annualized returns, your monthly investment of Rs 7000 in fixed deposits would amount to 36.67 Lakhs in next 20 years which is not enough for your retirement needs.
Tip: Try to invest in balanced and equity funds where you can expect 15% annualized returns in a 20 year investment horizon. This will make your Rs 7000 SIP per month; yield 1.06 Crores in 20 years.
Investment Myth 4. IPO
“I will invest in public issue of ABC stock and make quick listing gains as my broker advised me to invest in it.”
IPOs these days don’t offer guaranteed returns as it used to happen in 1980s or 1990s. Just to give a sense of IPO performances in the recent past, more than 60% of the IPOs trade below their issue price on the day of listing and more than 80% of the IPOs trade below their issue price after 6 months of listing.
IPOs have become more of an operator game where they push the prices up and then manipulate it to crash, till their price hits rock bottom. This is short term trading bet rather than disciplined approach to investing.
Tip: Invest in IPOs after looking at the valuation of the stock, study the company past, balance sheet and management capabilities before you invest your hard earned money in them.