The business prospects do not change minute to minute, but the share prices do change from minute to minute. Moreover this change can, many a times, be quite sharp and swift. It is these sudden and huge price fluctuations that can unnerve even the most seasoned investors.
History shows that the prices exhibit instability in the near-term but in the long run, the price trend replicates the business prospects. “A correction takes place to determine which investments are the tennis balls and which are the eggs. You want to own the things that bounce, as in tennis balls, and not in eggs.” advises William Berger.
This is possible by treading and trading carefully or doing what in common parlance is termed as the Systematic Investment Planning (SIP). It is the same as the RD (recurring deposit) in a bank FD, which you are quite familiar with.
I did some detailed number crunching on the Nifty since its birth in mid-1990 till Dec 2012 i.e. a period of 22.5 years. What were the returns
a) if I did an SIP for 'five' years starting on any given day
b) if I did an SIP for 'ten' years starting on any given day
Here is what I observed:
- If you stay invested in the market for ten years, there are 93% chances you will make money.
- Even in the worst case, the loss is about 11.4% in a five-year SIP. So don’t worry, you won’t lose your entire capital.
- On an average you can expect around [tax-free] 13% returns. This is far better than average [taxable] 8% returns on FDs
- Treat equity investment as a long term one for 10-15 years like your insurance or PPF (or at least as your five-yr NSC) and you will most probably end up with very good returns.
By the way, this analysis is for the market. Given that, many funds have handsomely beaten the markets, you may expect much better results than the market averages by investing in MFs. For example, I did a study of SIP for ten years in ten different funds from different AMCs across ten different years. And the returns? Min 20% and Max 40%.
The bottom-line: Great rewards for patience and persistence!
...Know how to become Rich SIP by SIP in my forthcoming publication 'Your Guide to Finance and Investments'.
