How about starting with a game? I promise, there is a prize for the winner.
A) What is common among the following numbers?
242 , 754, 348, 1143, 648, 946.
B) What is common among these numbers?
350, 1105, 3205, 741, 901, 780.
Let me guess, you did get the first one right. Good! But so did almost everyone. They all have 4 in common.
What happened to you when it came to the next one?
Nothing in common? Sure?
Well, the set of numbers have all the digits except 6.
Take a moment here and think. Aren’t these two very similar? One number present in all and one number missing in all..It probably is, but somehow it successfully fooled us. How?
While looking for a pattern and subconsciously preparing for the next incident, we put a lot more emphasis on what is present and eventually miss out on what is not. An example will probably clarify it a little better.
What is the last 10 year sensex return?
Guesses? 15%, 16%, 20%?
It is actually 7.68%! (As on 25.5.18)
How did you miss the bus by 50%? Because of this:
Sensex CAGR return in last 1 year: 13.58%
Sensex CAGR return in last 2 years: 16.17%
See, again a trap called pattern built by recent presence.
Seeing the last joy ride, a lot of things happened in the world of asset management. We got the new SIP registration number up by a whopping 92% in FY18. “Retail investors took to the SIP route as the preferred option, leading to 1.15 crore new SIP registrations in FY2018, nearly 92 per cent increase over the previous year,” city-based CAMS Asset Management Services, Deputy CEO, Anuj Kumar, said.
Besides, there’s no doubt that a lot of investor awareness, the power of the SIP, and the famous TINA effect have also contributed to this. But my question is, what is the expectation that is being carried in the psyche of these new entrants? Have they seen volatility ever? Probably no.
What happens when they face a correction? Here I would like to give you some alarming figures.
The above graph has segmented the SIP returns of DSP BlackRock Equity Opportunities Fund over different
market cycles. A few interesting points to note:
• From May 2000 to May 2003, the DSP BlackRock Equity Opportunities remained flat; an SIP would have earned a CAGR of ~6.0% during the same period. Investors who were not comfortable with returns below fixed income for a period of 3 years may have stopped their SIPs.
• Investors who held their SIP investment from 2000 to 2003, when the markets were flat, earned 6.01% returns. The same investors who held their investment for just one year longer till 2004 when the markets
started moving up, were rewarded with a 46.91% return. Returns sky-rocketed because units were purchased when the markets were flat and sold when markets started rising.
Now let’s look at a different market scenario where an investor experienced both bull and bear markets from June 2003 to end of 2010.
• Investors during the bull market from June 2003 to end of 2007 would have earned an SIP CAGR of 52.5%.
Markets corrected sharply which prompted a lot of investors to redeem their investments. The same investor who started an SIP in June 2003 and panicked and sold during the market correction in March 2009
would have earned only 6.9%.
• If that same investor continued the SIP investment till the end of 2010, when the markets recovered, a 27.3% CAGR would have been earned.
So again, we are back to the starting line where we saw an immediate presence (not getting return from your SIP at certain time frames) at times makes you overlook (read forget) what a similar pattern has to offer (in the long run, SIP does its magic and create a handsome kitty for the investor).
And so, if you ever think of stopping your SIP (and thus commuting the 8th deadly sin), save this article, read it again and thank me later.
Finally, what happens when you don’t stop your SIP? You allow the magician, the 8th wonder named Power of Compounding, to do its job. How does the spell work exactly?
An SIP of 10,000/- a month growing at 15% CAGR accumulates 27,52,171/- in 10 years. Good money. (Say X)
The same SIP continued for 20 years growing at the same rate beats a common math-driven expectation of 2X and becomes 1,49,72,395/-!!
For the ones who got the very first question right (4 in all the numbers) and are still waiting for the prize, here it is. You finally learnt the secret of wealth creation for an average Indian: NOT TO STOP YOUR SIP.
You, too, can thank me later.