Let me start with a simple question. 

Would you like to have a fit physique like say, Virat Kohli or Sindhu?

Assuming you are not that rare fellow human being who is actually far more fitter than them, for the rest of us, the obvious answer is usually an overwhelming – “Of Course, YES!”

Now think about it…

Despite a lot of us desiring this outcome, why is it that most of us have physiques nowhere close to this?

Simple. Coz, it’s tough. 

While the desiring part is super easy, the real struggle is in the process.

Mark Manson, the bestselling author of the book “The Subtle Art of Not Giving a F***” sums this up really well.

“People want an amazing physique. But you don’t end up with one unless you legitimately appreciate the pain and physical stress that comes with living inside a gym for hour upon hour, unless you love calculating and calibrating the food you eat, planning your life out in tiny plate-sized portions.”

So while all of us want the final outcome of Virat and Sindhu, we don’t want their struggle.

Now to be honest, most of us get this!

None of us actually need to be told that a fit body requires embracing pain, physical stress and discipline. 

So depending on the degree of pain we are ok to inculcate in our lifestyle, we accept our current physique and fitness levels as a natural outcome.

We know both Virat and Sindhu work really hard on their fitness. We are not up for the same levels of rigour, and peacefully come to terms with our own bodies.

So far so good.

But when it comes to investing, unlike in fitness, we conveniently forget the ‘pain’ part. 

All of us desire the outcome – higher returns and take it for granted, grossly underestimating the ‘emotional cost’ that we need to pay for it.   

Unlike a workout at the gym where you can visualize the physical pain, in investing unfortunately the pain comes in the form of emotions – fear, doubt, uncertainty etc – which is not tangible and very difficult to truly appreciate until experienced. 

Right now let us look at what is happening.

FD Rates have come down drastically… and past Equity SIP returns look awesome!

So the decision making process usually is in the lines of “Wow, the past 5Y SIP returns are great, let me start my Equity SIP”

But the real question that we must be asking is:

What does it really take to get these returns? What is the pain involved that no one seems to be telling me?

But before we figure this out, there is a much more basic question

Does an Equity SIP really deliver in the long run?

Instead of boring you with platitudes on the merits of a long term Equity SIP, I will rather let the actual data do the heavy lifting for me.

Cool. So it is pretty clear that Equity SIPs have lived up to their reputation of delivering solid long term returns.

With that fundamental issue out of the way, let us get back to our original question 

What is the emotional pain involved?

Three Failure Points

While Equity SIP historically has provided good returns over 5-10 year periods, the real challenge is crossing the first 5 years.

Why do we think so?

Because, there are three not-so-talked-about failure points which EVERY Equity SIP investor will have to endure without failing, in order to experience solid long-term returns.

Let us explore each of them. 

Failure Point No 1: The Disappointment Phase – “I expected FAR MORE”

There are intermittent periods of time where your SIP returns are between 7-10%. While this is not a bad outcome and is better than FD returns, as an equity investor you definitely expected a lot more from your equity SIP.

This is the Disappointment phase characterised by the typical ‘I expected far more” rant.

The longer this phase lasts, the more likely you are to reconsider your original decision to start an Equity SIP and consider stopping them. 

This Disappointment phase is the first enemy that you must be prepared for. 

In our experience, while this phase is disappointing, with some guidance or support most investors are able to live through this phase if it doesn’t go on for too long.

Failure Point No 2: The Irritation Phase – “My FD would have done better”

There are intermittent periods of time where your SIP returns are between 0-7%. This is much lower than what you would have got in your FDs. For many of us, this is not a scenario, that was a part of our expectations. We had started our SIPs seeing high past returns and this often comes as a rude unexpected shock.   

This is the Irritation phase. You are mentally kicking yourself and sighing “Even my FD would have done better”

The more this phase prolongs, you regret your original decision of starting the Equity SIP and there are high chances of you stopping your SIPs. 

This Irritation phase is the second failure point that you must be prepared for. 

This phase is a lot difficult to handle compared to the disappointment phase, and most investors in our experience give up on their Equity SIPs in this phase.

Failure Point No 3: The Panic phase – “My Portfolio value is even lower than what I invested”

Whenever there is a large temporary market fall, which is pretty normal for equity markets (Using history as a guide, a 10-20% fall happens almost every year and a 30-60% fall can be expected once every 7-10 years), your SIP returns may even turn negative for a short period of time.

While history tells us that this is a normal part of any SIP investor’s journey, since most of us start our SIP based on a single data point (either the past 3Y or 5Y or 7Y SIP returns) this scenario completely takes us by surprise. 

As the market fall continues, there is bad news all around (think Covid crash of 2020) and your SIP returns start dropping sharply. The more you stay patient, the more your portfolio takes a temporary hit. As you see your hard earned money eroding every day, eventually panic takes over and you decide to stop and redeem your entire SIP money.  

This is the Panic phase and by far the most difficult phase.

This is the third and most lethal failure point that you must be prepared for. 

Why do these failure points happen?

Temporary market falls (10-20% fall happens almost every year and a 30-60% fall can be expected once every 7-10 years). When it comes to equity markets, these temporary falls are a feature and not a bug. 

So anytime there is a market fall, this also pulls down the existing SIP returns. 

This is simple maths and let us see how this works.

Here is a table which shows the impact of a 10%, 20%, 30%, 40% and 50% market fall on 12% SIP returns and 15% SIP returns over different time frames.

You can see how the impact of temporary market falls is much more stark on the same SIP returns in shorter times frames. As the time frames increase, the impact of a temporary market fall is much lower on the overall SIP returns. 

For eg, let us see the impact of a 20% fall which hits a 15% SIP return at different time periods. 

The second thing that you would have noticed is that – the higher the fall, the higher is the impact. This is fairly straightforward.

Now we also know that short term temporary market falls are a common occurrence in equity markets and it’s impossible to predict the timing of these falls (remember the covid led 40% fall in Mar 2020).

This is why the first five years are very difficult as intermittent market falls lead to a sharp dip in SIP returns and there is a high likelihood of you experiencing at least one of the three failure points of disappointment, irritation and panic. 

As your SIP time frame increases, the impact of market falls is a lot lower (as seen from the table) and so is the impact of the failure points.

How do you prepare for these 3 points of failure and become a successful Equity SIP investor?

Understanding long term history

If you want to explore more, you can check this super interesting SIP Journey Matrix at link

This throws up some super interesting observations…

• The three failure points – Periods of Disappointment, Irritation and Panic, happens almost in every SIP investor’s journey – more frequently during the initial years
• In fact, out of the 206 five year SIP periods since the inception of Nifty 50 TRI, there are only 2 instances where an investor had a smooth journey without having to go through periods of disappointment, irritation & panic!
• When we looked at different 5Y Equity SIP journeys over the last 21 years, we found that
  1. Periods of Disappointment occur roughly 9% of the times
  2. Periods of Irritation occur roughly 13% of the times
  3. Periods of Panic occur roughly 16% of the times

But while all this is the sad, untold ‘struggling’ story part of Equity SIP investing, here comes the happy climax!

Whenever equity returns were low i.e when it hits one of the three failure points in the initial 3-5 years, as blasphemous and counterintuitive as it sounds, patiently continuing your SIP for another 1-3 years led to a dramatic recovery in performance!

Wow! But how in the world does the sudden jump in returns happen?

There are two things that lead to the sudden sharp recovery in returns

1. More mutual fund units are accumulated at lower prices during a fall

In these three phases, you end up accumulating more mutual fund units as the markets have corrected and for the same SIP amount you end up accumulating more units.

Here is a visual representation of how you would have accumulated more units during the Covid crash if you continued your SIP without panicking

2. Markets eventually recover and go up in the long run

Historically, Indian markets have always recovered from their falls and continue to go up in the long run (driven by earnings growth). The same math which brought the SIP returns down during a decline this time works in favor of us as the market returns recover.  Adding to the power of math, this time we also have higher no of mutual fund units (accumulated during the market correction) participating in the upside leading to a significant improvement in returns. 

So what is the solution to handle these three failure points…

Once you appreciate this simple yet counterintuitive insight that the seeds of strong returns are actually sown during these three tough phases (because you accumulate more mutual fund units at lower cost)…

The best approach to improve your SIP returns is provide it with two ingredients –

TIME and PATIENCE!

Did You Know: Historically, a patient SIP investor in Nifty 50 TRI, irrespective of when the SIP was started, always got an opportunity to exit at minimum of 12% returns over a 7-10 year frame!  

But, is there a strategy to avoid these 3 intermittent phases and pain?

Hand on your heart, you already know the answer. 

But let me repeat what you already know, but don’t want to hear – 

THERE ARE NO MAGIC BULLETS!

But then, how do successful investors deal with this? What is their trick?

There’s a scene in Lawrence of Arabia where Lawrence the protagonist puts out a match with his fingers and doesn’t flinch. 

Another man watching tries to do the same and screams. 

“It hurts! What’s the trick?” he asks.

“The trick is not minding that it hurts.”

For those who want to see the actual video, here it is…

You heard that. This is the secret trick to long-term Equity SIP returns!

Summing it up

If you want the benefits of something in life, you have to also want the costs.

Equity SIP investing is no exception.

While the long term returns are promising, to earn them, you will need to survive the three temporary but inevitable phases of Disappointment, Irritation and Panic. 

This is a lot more difficult than it looks and a lot of investors fail (stop and exit) during one of these phases. 

So, if you are starting your SIP, don’t ask if you want the past returns – everyone obviously wants it. 

Ask yourself if you want the intermittent emotional pain that the equity markets will inevitably deliver on you. Your long term outcomes will eventually be determined by your capacity to suffer in the short term.

So the trick to getting long term Equity SIP returns finally boils down to…

“Not minding that it hurts!” 

Happy investing 🙂