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Churning investments vs planting a tree

 

In most aspects of our life, Be it buying a house to selecting a school, to hiring for a job we look at the track record of the person or the place, in other how good they have been in the past. For example we look at buying a house based on how ‘good’ the location is, reputation of the builder, reference from family etc before deciding, Same goes for hiring, we look at the education back ground, experience, performance in previous job etc before we short list someone for a job.

However this checking the past to decide the future seldom works in investing,sadly. Especially in the short time frames like a year or two.  Many investors think that it is better to check performance regularly some times even less than a year and change the funds based on the returns that short time frame. They forget that they have planted a tree for the long term, it is not going to grow if we keep pulling it out and seeing how fast it is growing, it is not going to grow if we pull it out as we feel it is not growing fast and replanting it near to big trees, In fact we ensure that the tree does not grow by doing this and all of know this. But, in Investments we do it as we feel that there is a need to do something regularly, yes, sometimes there is a need to do change just as we take the weeds out and add manure, we need to check the investments too say once a year or two but only to check progress and not to change anything. If we keep moving from Fund A to Fund B every time as Fund A gave low returns vs Fund B over every few months or even a year or two, we are in fact pulling the plant out and replanting it elsewhere!

A good counter example for this is how  we treat our other investments such as Real Estate or Gold, how many of us sell all the jewelry we have only to buy it back again ? In fact most of us never sell jewelry nor do we sell Gold and buy say diamonds if diamond prices are moving up . Would we sell our houses every year and move to another area where prices are moving up more compared to the place we live in ? We won’t even think about it but when it comes to investments we happily sell one fund to buy another and then that to buy another in the name of chasing ‘good investments’.

Changes may be needed in our investments due to some factors but they are required far, far less than we imagine. In investing, frequent work actually hinders growth, the hard work here is to buy and hold. The best returns have been got by not buying the right fund at the right time but by buying and sitting on equity fund for decades. Buying and selling funds once a year to buy some other funds is a sure way to loose money A rock solid big tree takes years to grow, similarly investments would also grow in size, only if we patiently allow them to grow in the first place.

Happy weekend, May Day & Buddha Purnima wishes to all.

 

 

 

 

 

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