The Hindu Business Line : Long-term effect

My friend suffers from illusion of control. He, therefore, makes his own investment decisions, though he is a novice at the stock market. Not surprisingly, his investments have fared rather poorly. But he is not concerned because he believes that stocks always provide good returns in the long term. There is a flaw in this argument. What is it?

My friend intends selling his stocks in 2015 and use the money to fund his daughter's university education. What if an event occurs in 2015 that sends stock prices crashing? His portfolio may still be positive but not enough to fulfil his investment objectives.

Consider another scenario. Suppose the market crashes 25 per cent soon after he builds his portfolio. That may not be unrealisticHis portfolio has to now work harder to recover the initial losses and then generate profits. What do you think his chances are of fulfilling his investment objectives?

Of course, neither argument may hold water if you do not have an investment horizon. For then, you can simply take profits whenever your portfolio has generated sizable returns.

But how long will you wait? You may get frustrated and sell your holdings at just the wrong time. Often, stocks move up soon after you sell them! Patience is, therefore, a necessity. Mr Warren Buffett said: "My favourite holding period... is forever." But if you are not like Mr Buffett, do not delude yourself into believing that stocks will give you positive returns in the long term. For in the long term, we are all dead.

(The author is based in Toronto, Canada)

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