{"id":21837,"date":"2021-08-16T13:35:24","date_gmt":"2021-08-16T08:05:24","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=21837"},"modified":"2022-07-22T15:39:10","modified_gmt":"2022-07-22T10:09:10","slug":"equity-sip-investors-and-the-three-points-of-failure","status":"publish","type":"post","link":"https:\/\/fundsindia.com\/blog\/mf-research\/equity-sip-investors-and-the-three-points-of-failure\/21837","title":{"rendered":"Equity SIP Investors and the Three Points of Failure!"},"content":{"rendered":"\n
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Let me start with a simple question. <\/p>\n\n\n\n

Would you like to have a fit physique like say, Virat Kohli or Sindhu?<\/strong><\/p>\n\n\n\n

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Image Credits: <\/em>Virat Kohli@Instagram, JFW Magazine<\/figcaption><\/figure><\/div>\n\n\n\n

Assuming you are not that rare fellow human being who is actually far more fitter<\/em> than them, for the rest of us, the obvious answer is usually an overwhelming – \u201cOf Course, YES!\u201d<\/strong><\/p>\n\n\n\n

Now think about it\u2026<\/p>\n\n\n\n

Despite a lot of us desiring this outcome, why is it that most of us have physiques nowhere close to this?<\/strong><\/p>\n\n\n\n

Simple. Coz, it’s tough. <\/p>\n\n\n\n

While the desiring part is super easy, the real struggle is in the process.<\/p>\n\n\n\n

Mark Manson, the bestselling author of the book \u201cThe Subtle Art of Not Giving a F***\u201d sums this up really well.<\/p>\n\n\n\n

\u201cPeople want an amazing physique. But you don\u2019t end up with one unless you legitimately appreciate the <\/em>pain <\/em><\/strong>and <\/em>physical stress<\/em><\/strong> 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.\u201d<\/em><\/p>\n\n\n\n

So while all of us want the final outcome of Virat and Sindhu, we don\u2019t want their struggle.<\/p>\n\n\n\n

Now to be honest, most of us get this!<\/p>\n\n\n\n

None of us actually need to be told that a fit body requires embracing pain, physical stress and discipline. <\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

So far so good.<\/p>\n\n\n\n

But when it comes to investing, unlike in fitness, we conveniently forget the \u2018pain\u2019 part. <\/strong><\/p>\n\n\n\n

All of us desire the outcome – higher returns and take it for granted, grossly underestimating the \u2018emotional cost\u2019 <\/strong>that we need to pay for it.   <\/p>\n\n\n\n

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. <\/p>\n\n\n\n

Right now let us look at what is happening.<\/p>\n\n\n\n

FD Rates have come down drastically<\/strong>… and past Equity SIP returns look awesome<\/strong>!<\/p>\n\n\n\n

So the decision making process usually is in the lines of \u201cWow, the past 5Y SIP returns are great, let me start my Equity SIP\u201d<\/em><\/p>\n\n\n\n

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?<\/strong><\/p>\n\n\n\n

But before we figure this out, there is a much more basic question<\/p>\n\n\n\n

Does an Equity SIP really deliver in the long run?<\/span><\/strong><\/h3>\n\n\n\n

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.<\/p>\n\n\n\n

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Cool. So it is pretty clear that Equity SIPs have lived up to their reputation of delivering solid long term returns.<\/p>\n\n\n\n

With that fundamental issue out of the way, let us get back to our original question <\/p>\n\n\n\n

What is the emotional pain involved?<\/strong><\/p>\n\n\n\n

Three Failure Points<\/span><\/strong><\/h3>\n\n\n\n

While Equity SIP historically has provided good returns over 5-10 year periods, the real challenge is crossing the first 5 years<\/strong>.<\/p>\n\n\n\n

Why do we think so?<\/p>\n\n\n\n

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.<\/strong><\/p>\n\n\n\n

Let us explore each of them. <\/p>\n\n\n\n

Failure Point No 1: The Disappointment Phase – \u201cI expected FAR MORE\u201d<\/strong><\/h4>\n\n\n\n

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.<\/p>\n\n\n\n

This is the Disappointment <\/strong>phase characterised by the typical \u2018I expected far more\u201d rant.<\/p>\n\n\n\n

The longer this phase lasts, the more likely you are to reconsider your original decision to start an Equity SIP<\/a> and consider stopping them.\u00a0<\/p>\n\n\n\n

This Disappointment phase is the first enemy that you must be prepared for. <\/p>\n\n\n\n

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\u2019t go on for too long.<\/p>\n\n\n\n

Failure Point No 2: The Irritation Phase – \u201cMy FD would have done better\u201d<\/strong><\/h4>\n\n\n\n

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.   <\/p>\n\n\n\n

This is the Irritation<\/strong> phase. You are mentally kicking yourself and sighing \u201cEven my FD would have done better\u201d<\/p>\n\n\n\n

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. <\/p>\n\n\n\n

This Irritation phase is the second failure point that you must be prepared for. <\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Failure Point No 3: The Panic phase – \u201cMy Portfolio value is even lower than what I invested\u201d<\/strong><\/h4>\n\n\n\n

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.<\/p>\n\n\n\n

While history tells us that this is a normal part of any SIP investor\u2019s 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. <\/p>\n\n\n\n

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.  <\/p>\n\n\n\n

This is the Panic<\/strong> phase and by far the most difficult phase.<\/p>\n\n\n\n

This is the third and most lethal failure point that you must be prepared for. <\/p>\n\n\n\n

Why do these failure points happen?<\/span><\/strong><\/h3>\n\n\n\n

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. <\/p>\n\n\n\n

So anytime there is a market fall, this also pulls down the existing SIP returns. <\/p>\n\n\n\n

This is simple maths and let us see how this works. <\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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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. <\/strong><\/p>\n\n\n\n

For eg, let us see the impact of a 20% fall which hits a 15% SIP return at different time periods. <\/p>\n\n\n\n

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The second thing that you would have noticed is that – the higher the fall, the higher is the impact. This is fairly straightforward.<\/p>\n\n\n\n

Now we also know that short term temporary market falls are a common occurrence in equity markets and it\u2019s impossible to predict the timing of these falls (remember the covid led 40% fall in Mar 2020).<\/p>\n\n\n\n

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. <\/p>\n\n\n\n

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.<\/p>\n\n\n\n

How do you prepare for these 3 points of failure and become a successful Equity SIP investor?<\/span><\/strong><\/h3>\n\n\n\n

Understanding long term history<\/span><\/strong><\/h4>\n\n\n\n
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If you want to explore more, you can check this super interesting SIP Journey Matrix at link<\/a><\/p>\n\n\n\n

This throws up some super interesting observations…<\/strong><\/p>\n\n\n\n