In investing, what is comfortable is rarely profitable. Yet, most investors tend to invest in what is easy and comfortable to buy. Insurance policies are a case in point as they seem to guarantee returns and are deemed safe. Investors have also been very comfortable buying trending investments like cryptocurrencies because everybody was making quick returns there. None of these comfortable investments, however, generate consistent inflation- beating returns in the long term. Markets also tend to reward those who do not seek refuge in their comfort zone. Be it the 2008 market crash or the 2020 descent, those who continue to remain invested gained in the long term.
There are three areas where comfort becomes a deterrent to growing investor wealth. The first relates to safety in known investments. Safety, however, translates into low returns. Thus, fixed deposits and insurance plans—the mainstay in most portfolios—do not beat returns on a post-tax basis. The much revered gold does but the high costs associated with buying jewellery, which are often not accounted for while calculating returns, affects post-expense performance.
The second is being comfortable with high returns without taking risk and regulation into consideration. High yielding products like NCDs and covered bonds come with huge risks and can wipe out your wealth. The crypto story over the last couple of years shows why get-rich quick schemes cannot be counted upon for long. Unregulated investments like gold jewellery schemes from jewellers or daily trading plans promising guaranteed returns can default anytime without any recourse for the investor.
The third is being comfortable with short-term gains at the cost of long-term gains. Except when markets are going up, investors find it difficult to hold on to their equity investments. These days, I am often asked by investors whether they should continue with their systematic investment plans, given the stagnant returns over the last one year. This conundrum is due to investments that are not aligned with financial goals. New entrants to the equity markets are unsure as to whether they need to be invested for the short or long term, especially if they do not have a financial goal, and will take actions based on market movement.
Clearly, product choices in one’s portfolio need to be goal- based, adhere to a proper regulation and grievance mechanism, and generate inflation-beating returns. Comfort in investing actually comes in once the investment options have been narrowed down, based on the above.
For instance, people can evaluate different investment avenues such as real estate or equity mutual funds for their retirement goals and opt to invest in what they are more comfortable with. If investing in real estate works for such investors and gives them peace of mind, then they are better off with real estate than trying to navigate the equity markets and vice versa. Some investors may prefer mutual funds to dealing with tenants or taking care of property investments. However, be mindful of the returns being given up for such comfort. Equities are more likely to perform better than a residential property bought on loan. Similarly, a debt fund may give higher returns when compared to fixed deposits. When you indulge in such trade-offs for better returns, make sure the investments meet the basic criteria of being regulated and beat inflation.
With all the due diligence, investors will still face uncomfortable times and it is their action during such time that determines their portfolio growth. Emotions do take over during uncomfortable times and one way to manage that is to shut out the noise and ensure that auto pilot investments continue. There will always be some reason for markets to fall or stagnate and these events are beyond the control of investors. What they can control is their investment decisions during these times. A series of uncomfortable investing actions can lead to outsized returns over time.
Get comfortable with being uncomfortable!