Slow & Steady Wins The Investing
Race!
In the famous Aesop fable "The Tortoise and
the Hare," a hare constantly teases a tortoise for moving so slowly. One
day the tortoise challenges the hare to a race. The hare is so sure he'll win
that he goes to a nearby field to eat cabbage while the tortoise crawls his way
on the race course. Tired from the meal and the sun, the hare falls asleep
about halfway through the course. To the hare's surprise when he awakes, the
tortoise had beaten him to the finish line.
The moral of this fable, slow and steady wins the
race, is often used in investing. It reminds people that they can be rewarded
if they continually invest money over a long time period—like the tortoise
winning by staying on the race course.
People who focus on getting rich quickly can make
bad decisions and mess up their investment plan, and ultimately fail to reach
their goal.
Let us look at the case of Suresh and Raman.
Suresh worked as
a school teacher
and saved Rs. 5000/- per month from
the age of 30 till the retirement age of 60. He started a SIP in a diversified
equity mutual fund that delivered 15% CAGR. Suresh had invested Rs. 18 lac in
30 years. His corpus was Rs.3,50,49,103/- when he was 60 years old! He is a typical tortoise investor – slow and
steady.
Check these links for
knowing the value of the investments after 30 years.
Raman on the
other hand is a software professional
earning twice as much as Suresh. He enjoyed a high lifestyle with lots of
gizmos and foreign holidays. The latest car was a must for him. Only when he
was 45 years old did he think about saving for retirement and immediately started a SIP of Rs. 10,000/- per month till the age of
60 generating 15% CAGR, the same as Suresh. At 60 his corpus was only Rs.67,68,631/-
although he was saving 10,000/- per month and had put away Rs. 18 lac in 15
years, the same as Suresh.
Check these links for
knowing the value of the investments after 15 years.
Raman was the
hare investor.
Just as in the fable Suresh turned out to be the
winner.
For the same amount invested, look at the
difference:
Suresh the
tortoise has Rs.3.50 crore.
Raman the hare has
only Rs.67.68 lac.
Now, that’s the power of compounding!
Like the Aesop's hare, hare
investors are overconfident and turn a blind eye to the ravages of volatility,
which take a long time to recover from. Tortoises, having sustained less
damage, continue their slow but steady progress.
The math of recovering from huge
losses may astonish you. Let's say your portfolio value is Rs. 15 lac and it
loses 33 % of its value, leaving you with only Rs. 10 lac. Many believe they'd
be back where they started if they gain 33 %. But this gain wouldn't restore
their losses. They would actually need to make a 50 % gain to get back to Rs.
15 lac.
Investing is
a marathon. Slow and steady wins the race. Trying to catch every rally and
moving from one sector to the next ‘hot’ area of the market is a mug’s game. It
makes you feel like you’re doing something but you’re really just chasing your
tail.
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