Why you should not invest in Equities

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You haven’t heard this one before!- Contrary to what you would have heard from every TV channel and investment advisor – financial planners included about how important it is to invest in equities to achieve long term goals.  Here is why you should not invest in equities.

Its lucrative because it looks complicated – Not lucrative for you but for an assortment of TV channels that offer running minute to minute commentaries on stock markets, stock brokers who make intelligent predictions on the next market movement and of course fund managers who are in the asset collection business. All the above would like you to believe that without equity you are going to be poorer than your neighbor  Not necessarily true. Most people will get rich because of higher income & higher savings relative to expenses.

Don’t understand it , don’t invest  -The word ‘Equities’ is  generic and encompasses all kinds of companies with no real grading . Do you know how to pick the right kind? .Not only do  equity investments require a lot of research and understanding valuations  but also a deep interest in making money through participation in successful businesses. Not everybody’s cup of tea.

Equities is not a three to four year investment vehicle- A lumpsum invested at the peak of any market cycle will have a longer waiting period. Say an investment made in HDFC Equity Fund (one of the best performing equity schemes for almost two decades) at the peak of the 2003-2007 rally would sit on a negative return of- 2%  CAGR even after a waiting period of five years .Think what happens if you made grand plans based on a high expected return.  It is possible that a bad market cycle lasts longer than your holding period.

Losing capital is no fun .Of course equities beat inflation, but there are quality companies that can  do that  and businesses that  have eroded  client wealth . You don’t have to look back too far to see how the one time darlings of the stock market, during the bull run of 2003 -2007 are faring pretty bad on the returns chart. It could take years(or never) before stocks like Suzlon, Unnitech , RCom and many others will see the price highs of their heydays. The same holds true for several equity mutual funds and  products like PMS/Insurance Ulips etc.

A game of patience -Another side of the same coin is when good quality companies do nothing for investor wealth because overall sentiment in their line of business/macro factors  is bad .Or sometimes they just keep losing share value for no apparent reason . Such companies may take years before delivering returns to investors. Without the right guidance  it is common to see investors sell such stock out of sheer frustration .Investors start believing that  they must have missed something and low valuations are a  reflection of a badly managed company .Do you have the stomach for  waiting for  years, sometimes  bang in the middle of a galloping bull market , happy to see your stock doing nothing , while unknown stocks may be taking  double digit jumps on a daily basis ?.

Without doubt good quality equities fight inflation and can create true wealth in the long run. But you must invest in equity only with a clear understanding of the business, valuations, and tentative holding period. You need to do all of this with strict planned allocations to the whole asset class ,as well as to individual stocks/products/funds. And in addition to all the above you need to reign in emotional biases. If you don’t have the time for such equity management you can hire an advisor – on fee basis .Such an advisor can conduct all the research required, be it in direct stocks or in picking products/mutual fund schemes managed by smart fund managers. He/she can hand hold you through market cycles and ensure you take the right decisions.

Finally the important question is whether equities is the right asset class for you .Don’t get swayed by thumb rules in asset allocations .Most of us will still achieve our life’s goals with debt investments. You may have to earn more and save a lot more . But it beats losing money and realizing too late that equity investments were not for you.




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