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Monday, June 14, 2010

Stock Market Myth

Over time, the market has averaged about a 15 % return annually.

How many times have you heard this statement or one like it to justify investing in the stock market? The statement is sometimes used to suggest that investing in the stock market will earn you a 15 % return if you leave your money in long enough.

The problem with statements like this is that they are half-truths, often used out of context with beginning investors who don’t understand the complete truths.

Problem One

The first problem is the statement suggests that you should expect a 15 % annual return from your investments in the stock market. Really? Which investments?

People unfamiliar with investing may assume that buying a few (or one) stocks will set them up for this famous 15 % return.

Problem Two

What Market?
The second problem is what do they mean by “the market?” It wasn’t the Sensex in 2008, because it didn’t return 15 %. You can buy mutual funds that track large portions of the market like the BSE 100 or S&P CNX 500, but they didn’t perform any better.

The fact is that by investing in individual stocks you are not buying “the market,” so what the market does is of little concern to you.

Your focus is on the portfolio you create and how it will perform in the future, because that’s all that matters. If you want to keep score by comparing your gains to those of some benchmark like the Sensex, Nifty or S&P CNX 500, feel free to do so.

However, keep in mind investing is not about beating a benchmark. It is about securing your financial future. If the S&P CNX 500 is up 2 % and your portfolio is up 3 %, that will be little comfort when you need real Rupees to spend in your retirement.

Being a long-term investor, you should focus on buying quality stocks that will meet your financial goals. Investments based on sound research in strong fundamental companies in the right sector tends to outperform the indices in a long run.