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Amit, a prospective client in his early fifties, held 82 mutual fund schemes, 28 listed equity shares, and a smattering of bonds and preference shares. He had accumulated this mishmash of investments over the past 22 years. He also had large balances in his Employee Provident Fund and National Pension System accounts.
Our analysis of his portfolio showed that he had invested around ₹ 1 crore in multiple lump sums. The total value of his investments now stood at around ₹ 2 crore.
Amit gloated about his investment skills based on the fact that his investment in the shares of one company had multiplied 100 times since 2001. He mentioned that he had studied the company well at the time of investing. He received his annual bonus around the same time and hence invested ₹ 20,000. The share price fell drastically after he invested. Not wanting to book a loss, Amit had held on to them, though he did not invest more as he had intended. After several years, the share price revived and his investment was now valued at around ₹ 20 lakh.
Our queries showed that Amit did not monitor his portfolio closely. His guesstimate of the total value of his portfolio was off by 20 per cent. He also had no idea of the annualised return from each of his investments, nor from the portfolio as a whole.
All his investments had a similar story. Some had done well and some and done badly. Amit was proud that he did not have even one big loser among the equity shares and mutual funds he held. Amit had never made big investments in any one share or mutual fund scheme, and had rarely, if ever, sold anything.
Our analysis showed that the return on his entire portfolio was only 4 per cent per annum. His investment value should have been 25 per cent higher just to match inflation. If he had invested the same money in an index fund, the value of his portfolio would have been around ₹ 6 crore, three times what he had achieved. While Amit thought he had done well, he had actually done quite badly.
Amit’s investing style consisted of extended periods of inaction interspersed with bouts of activity. It had many positives: He had waited for decades for results from his equity investments; he hadn’t borrowed to invest; and he had stayed away from investment-cum-insurance policies. Yet, unplanned investments and mindless over-diversification had produced a disappointing outcome.
Amit readily admitted he would have sold the hundred-bagger much earlier had the absolute value been higher than it was. In effect, even the hundred-bagger was a fluke arising from laziness rather than conscious choice.
Many ‘money rich but time poor’ investors like Amit are unable to create wealth despite allowing their equity investments a lot of time to grow. That is because their ability to wait is actually inertia and not patience. Inaction, when exercised consciously, is patience, otherwise it is inertia or laziness. Patience can work wonders if the equity investments are structured well. Index funds are a simple tool that can generate serious wealth for the patient investor.
An investment advisor, who can manage investor behaviour, can also play a crucial role by ensuring that the time-poor investor doesn’t make mistakes during his brief bursts of hyperactivity. He can also construct a portfolio based on a pre-agreed mix of risk and return and ensure that the investor stays the course and reaps the rewards over the long term.
The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; Twitter: @harshroongta
(A slightly different version of this column first appeared in the Business Standard on September 12, 2022)