The long term is a great leveler in life - and in investments. We often make mistakes in day-to-day life and regret committing them in the first place. While it's normal to be captivated by short-term errors, the key is not to lose sight of your long-term goals and keep moving ahead. In most success stories, you will find long-term planning and sheer focus on it as the major determining factor.
The same goes for investments. Don't get stuck on short-term performance of your investments but keep a long-term horizon and focus on them. Buy quality stocks, diversify your portfolio properly, sit back and relax. A diversified long-term portfolio has the greatest potential to achieve your financial goals, even if you commit some mistakes. Our analysis of the performance of the Nifty 50 companies in the last 15 years corroborates this philosophy very well.
Considering the Nifty 50 as a well-diversified portfolio, we invested ₹10,000 in each of the stocks of the Nifty 50 Index of 2001. Then we checked the performance in the next one year, five years, ten years and 15 years. The returns came out to be 14.7 per cent, 40 per cent, 23 per cent and 18 per cent, respectively. For simplicity, we excluded those companies which either merged or got delisted. In the second step, we assumed that rather than investing in all of the Nifty 50 companies of 2001, one invested only in those which outperformed the Nifty. The return in the next one year without the losers stands at 40 per cent, which means you could have made 25 percentage points more by investing in future winners instead of all the 50 companies. That's huge, but now let us see what happens in the other time frames. In five years, returns from all the winners stand at 47 per cent, an outperformance of 7 percentage points. Similarly, in ten years, the winners outperformed by 4.7 per cent and in 15 years the outperformance was just 2.8 per cent.
This exercise shows that in a well-diversified portfolio, the losers do not matter in the long term. Even if many of your picks do not go right, that will be taken care of by the gainers in the long term. The reason for this is that while your losses are capped, your gains are theoretically infinite. In the study above, the loss in a single stock is limited to ₹10,000 but the upside is unlimited. In 15 years, there were 17 companies which underperformed the index but the portfolio still managed to get returns close to that of only the winners.
There is no short cut for investment success. Remember, invest in fundamentally strong companies, diversify your portfolio and leave it for a long time. Stop worrying about short-term movements of stocks and life. Instead, focus on the long term. There are a lot more interesting things to do in life.
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