Why Investor Returns Lag Investment Returns?

Why Investor Returns Lag Investment Returns?

Discrepancy between

Investment Returns and Investor Returns – Unraveling the Gap

Equity and equity-based products are renowned for offering robust returns and substantial capital appreciation over the long haul. High-profile investors like Mr. Rakesh Jhunjhunwala and Azim Premji, who have amassed substantial fortunes from the stock markets, exemplify the potential. For those interested in delving into stock market investments, consider enrolling in the Online NSE Academy Certified Capital Market Professional (E-NCCMP) course on Elearnmarkets.com.

Individual investors, driven by a desire to emulate the accomplishments of successful investors and corporations, often venture into the stock market. Yet, retail investors typically find themselves unable to match the returns posted by the Sensex or major investors. A striking instance lies in the Sensex's 280% surge between November 2011 and November 2014. Despite this impressive surge, very few retail investors could boast similar gains. Although the top 10 midcap funds achieved a 25% plus Compound. Annual Growth Rate (CAGR) over the last five years, such returns remained elusive for many investors.

During this period, average retail investors didn't amass substantial wealth. Low participation levels among retail investors stand as the primary reason behind this discrepancy between investment returns and investor returns. Now, let's delve into the underlying causes.

Limited Knowledge and Decision-Making Abilities – Regrettably, the average retail investor often lacks sufficient knowledge and the ability to make sound decisions when it comes to stock market investments. Many struggle with interpreting balance sheets, income statements, and comprehending how macroeconomic conditions impact the stock market.

Typically, retail investors resort to reading 'Top Stocks to Buy' or 'Stocks to Sell Today' in the news or relying on recommendations from friends. Following such recommendations without a deep understanding of the market, investment plan, and impact of macroeconomic factors is a flawed approach. Effective investing requires comprehension of market dynamics, influencing factors, and informed stock selection, as opposed to impulsive buying and selling based on recommendations.

Missed Opportunities – Between March and July 2015, retail investors injected Rs. 45,127 crore into equity mutual funds. However, during the same period, foreign institutional investors (FIIs), who significantly influence the Indian stock market, were net sellers, offloading stocks worthRs. 8,950 crore from April to August 2015. This trend reflects retail investors' misguided actions. In contrast, FIIs make investment choices based on thorough research and analysis. Retail investors, both in India and globally, tend to purchase high and sell low, often attempting to time the market once the lucrative phase has passed, leading to loss-bearing stocks.

Frequent Investment Switching – A lack of discipline characterizes retail investors, who frequently switch investments without maintaining a long-term perspective. Notably, in the case of Initial Public Offerings (IPOs), many investors divest within the first week of listing. At the first sign of market volatility, retail investors tend to panic and sell. Nonetheless, stock market and equity-based product returns prove attractive over the long haul, rendering short-term market turbulence an unwarranted cause for selling blue-chip stocks.

Emotion-Driven Buy/Sell Actions – Emotions tend to take precedence when retail investors face life events such as financial downturns or retirement. Often characterized by a low-risk tolerance and modest investment capacity, these investors still anticipate remarkable gains. Research consistently reveals that overconfidence clouds people's judgment, whether in investing or driving. Overconfidence can lead to poor decisions founded on a baseless sense of certainty.

Irrational Conduct – The herd mentality often prevails. Retail investors tend to follow prominent investors' cues, mirroring their actions without fully understanding the underlying rationale. Significant investors might sell stocks having achieved their goals. Has the retail investor reached his or her targets? Such actions undermine the concept of informed decision-making and diminish the potential for optimal returns.

Loss Aversion – Retail investors exhibit a strong aversion to losses. Even if certain stocks are in the red, they hold onto them in the hope of eventual recovery. Some investors find it more acceptable for their portfolio to decline in value rather than realize an actual loss and redirect funds towards more promising options.

Apart from technical and financial knowledge, sound emotional behavior is a critical determinant of retail investors' success, helping them sidestep misjudged decisions.

Inadequate Participation – The Indian stock market has witnessed significant returns over the past two decades. Despite this, retail investors have reaped limited benefits, as they comprise a minor proportion of Indian equity market participants. A 2013 RBI report underscores this fact, indicating that only 3.5% of investors are involved in shares and mutual funds. Although this figure has slightly risen, retail investor participation remains below 5% of the country's total population.

Keys to Enhancing Investor Returns:

1.     Craft an investment strategy aligning with your financial status and risk tolerance, adhering to it steadfastly.

2.     Exercise patience, discipline, and vigilance while managing your investment portfolio.

3.     Modify your investment strategy based on economic shifts and alterations in your financial situation.

4.     Seek professional guidance from a financial advisor if your investment proficiency or time availability is limited.

5.     Recognize that incessant buying and selling isn't essential; certain phases warrant inaction.

6.     Refrain from unquestioningly following media or purported experts. Rely on your own research or consult true professionals for investment decisions.

 

Article Source - https://blog.elearnmarkets.com/investment-returns-vs-investor-returns/