Stay away from investing in stock markets

“Sensex rises 500 points to touch an all time high.” reads today’s stock markets news headlines.

The Sensex and Nifty are touching new highs on weekly, monthly and yearly basis. Soon, they will probably soon be at their all time highs. It’s the bull market.

Source: Google/Yahoo Finance; Sensex Chart for 5 years. as on Sept 7, 2016

The social conversations have turned to stocks that one is buying or planning to buy, the sectors that will lead the bull run and the money made.

Seriously, it is hard to ignore. The FOMO or fear of missing out is gripping you. You too want to be part of it.

You want to ride the bull too.

The issue is that you have never invested before in stocks or mutual funds. Bank FDs, EPF, PPF, etc. have been your primary investment avenues so far.

But now you want more.  

The Bull has lured you to invest in stock markets

Over the past few weeks, I have received queries from several wannabe investors of mutual funds.

They have studied the markets and various mutual funds over the past 2 to 3 months, even shortlisted funds for themselves.

They have done a thorough study by going through websites, forums, magazines and expert views. This portfolio will help them generate wealth over the long-term.

Sounds great.

But probe deeper and what emerges is that the 1 parameter that drove the entire selection. That parameter is past returns.

“Past performance is no guarantee of future performance.”

Those crying out the warning go hoarse without any effect on investor behaviour.

And that is where the portfolio selection fails.

What is wrong with this approach of using past returns? Read this –

“A rising tide lifts all boats. It’s only when the tide goes out you come to know who is swimming naked.”

It took me a long time to understand the wisdom of the above words and I am still not sure if I have understood it fully.

Here’s my warning.

You might want to ride the bull of the stock markets. But you are not ready for the bull crap.

You will come to know soon as to what I mean.

Read more: John Bogle’s 8 rules to select a mutual fund portfolio

Do you have what it takes?

For each one of you wanting to ride the bull, I have a small exercise for you.

You have decided to invest in mutual funds.

List down the funds in an excel sheet. For each selection, write down why did that fund make it to your list. Additionally, you should also write about the alternative that you considered and why that alternative did not make it to the list.

It’s a simple exercise. If you cannot do it, you are not ready to invest.

If you do it. It is great!

Time for the next step.

Assume that you were to invest today.

For each of the funds, write the actual amount you are planning to invest. In the next column, write 50% of that amount and mark it in red colour.

You should understand that it is likely that at some point your portfolio could see that red figure. Look at those numbers and think hard. What does it make you feel?

Oh sorry, wait! You have to put the column headings too. Please mention the current year for the investment column, say 2016.

Add two more years to the current year you chose and write it in the next column heading, in this case it will be 2018.

Essentially, what it would mean is that your portfolio is down by 50% even after 2 years of investment.

Are you really ready for a possibility of a negative return after 2 years?

If not, then my humble advice, forget the stock markets. At the first sign of red, you will lose your patience and flee.

You might be ready for the bull but not the bull crap.

Stay away!

Read more: Equity Investing – As I understand it!