The one big learning of 2012

As the year draws to a close, I’m sure everyone is feeling quite pleased with their portfolios. I don’t see anything that has gone down this year, and I think this is one of those years where you couldn’t have lost money even if you wanted to.

Zooming out a little, things aren’t so rosy, India is at about the same level as it was five years ago (actually -3.14%), and if you regularly invested in the market in this time, you would have had negative real returns at this point.

However, when I look at my own portfolio, which has always entirely consisted of stocksÂ or cash – things haven’t been that bad. (In this time period, I have invested in both US and Indian equity markets.)

I am very glad to be lucky in this respect, but the one thing that I have seen in the past few years is that your returns are not linear and gains as well as losses will be concentrated in a short time frame, and you should be properly positioned for those time periods.

Most people lose money because they start investing at the wrong time, and then compound things by getting into penny stocks, and other momentum trades which ultimately pan out very badly.

For example, I see a lot of people talking about stocks, and boasting about their investments right now when the market has already risen so much. These very people likely stopped investing last year when the market was doing badly and presented a great opportunity to buy.

When the market goes down again (which it eventually will) you will see the same people talking about exiting stocks completely, and talking as if stocks will never recover. That will be the best time to invest, but I’m fairly certain that majority of the investors will either be pruning down investments at that time or selling out completely.

This is nothing new and has been talked about by people zillions of time, but somehow when the market is up, people think that they will easily able to stomach a 20% fall, but when the fall materializes, they just completely panic.

The way 2012 has panned out makes me feel that investing regularly is not enough, you really need to take advantage of the bad times or the times of crisis. If you aren’t aggressively buying during crisis periods, the volatility and high blood pressure that the market brings you will never be worth the returns you make from it. Â At the same time you need to temper down when the market is up, and when your neighbor and his dog are making a killing in the market. As far as the market is concerned, nothing is worse than following the herd.