Saturday, 17 October 2015

Returns vs. Offer: Why You Should Not Be Very Happy about Your Returns?

Booming markets see a lot of people beaming with pride because their portfolios have gained significantly. As bulls take charge, the grin on investors' faces only gets wider, as they see their portfolio worth inching upward. On the other hand, in bear markets many of us shy away from discussing our portfolio performance. This is because our portfolios are losing money and hence showing negative “returns.” The so-called “returns” figure seems to have become the benchmark of success in investing in spite of the fact that it is highly flawed.

The “returns” figure on which many of us focus so much is an illusion. If your stock portfolio is up by 10 percent, it means nothing! You haven't got that money in your hand. Similarly, just because your portfolio is down 10 percent, that again means nothing; you won't lose a penny unless you sell. Moreover, given the nature of the market, it’s foolhardy to read too much into your returns figure because they can fluctuate wildly. Today your portfolio is up 10 per cent; tomorrow, it may be up 8 per cent; a week hence, it may be down 5 percent. Even one good or bad year can severely impact your multi-year returns. All in all, the “returns” figure is highly unreliable unless those returns have been booked.

Interestingly, the word “returns” is a wrong word to use because you haven't gotten anything in return; what actually have is an “offer”—an offer to sell your stocks and you will gain/lose so much. Unless you act on the offer, you haven't made or lost any money.

The implication works both ways. Don't get too happy because your portfolio is showing a positive offer and don't get too disappointed because the offer is negative. The market comes to you every day with an offer, and that's how it is. Only when you sell your stocks does the offer become your returns. That means to make money in the stock market you are very much expected to sell your stocks. Buying a good stock is only half the thing. Knowing when to sell is as much important as, if not more than, knowing when to buy. The key to making money in the market is summed up below:

  1. Spotting good companies available at a bargain
  2. Holding onto their stock till it gets appropriately priced
  3. Selling it
  4. Putting the proceeds back in other good companies trading at a bargain
  5. Repeating the above steps

So, don't get too excited (or dejected) about your “offer.” Accept the offer when it's the right time to do so. Once you have made “real” profits, that’s the right time to tell everyone about your “returns” with an inflated chest.

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