Minimalist's approach to financial independence
The idea of investing to grow rich and financially independent has evolved around the foundation of having free time. Time to do things which have a higher non-material significance. For most people investing is a way to retire early and follow their hobbies or be able to spend time with their family.
However, in recent times while investing has become easier and more accessible by almost anyone- it's got it's vices along.
Recently, the markets have made available an interesting investment instrument through the "Index ETF". For any un-sophisticated investor- the "Buy Right, Sit Tight" kind, I don't see why they should indulge in the active-investing route.
Active-investing; While this lets you choose what stocks you wish to hold, the timing of investment decision. It brings with it the downside of high fees and continuous research. Research needs time, which compromises the key essence of investing for a future when you have ample time.
However, Passive- Investing; (For this article focussing on the Nifty ETF); Lets you invest in the basket of the top 50 Indian stocks (market capitalisation weighted)- irrespective of what stocks they are. Effectively reducing churning cost to "nil", while giving you an exposure to the growing emerging market GDP. (cross-reference to the market cap/GDP ratio and top 50 stocks/total market capitalisation %)
Stats and Facts
Let's talk about NiftyBees since its the oldest ETF- launched in December of 2001. A major downside to investing via ETFs previously was low liquidity, which in recent times does not pose that big a threat as it once did.
Studying a 15-year History:
Nifty and its ETF
Nifty has grown from 2265.60 to 11,073.45,(viz.- 11.1578% CAGR) in 15 years. Similarly, the Niftybees ETF returned 11.3862% CAGR consistently for the past 15 years.
Quoting an article from MoneyControl.com dated May,18th'2020:
"Only 48% of stocks in the nifty have remained unchanged for the past 15 years."
While, only 5 stocks have remained in the top 10, consistently for the past 15 years.
From a total of 1619 stocks listed in the NSE today, only 638 were listed before 2006, of which only the top 25% stocks made a return over 19%pa while the average return was 8.65%pa.
Implying roughly a 10% probability of a stock bought in 2005 having returned over 19%, considering the stock existed today.
These probabilities do not account for survivorship-(viz.- considering only the stocks whose data is available, those who have survived for 15 years) also ignoring transaction costs and fees to manager/broker etc.
However, none of the data discussed is any indication of how instruments and markets perform in the future.
Having explained how it would have made sense for an investor to invest in Niftybees index ETF instead in the past, another important factor would've been a strategy.
Investing without conviction would never yield impressive results. Majorly because without conviction, you would never size upon a position and without a sizeable position, even the best returns in absolute terms would truly be rendered meaningless. People have an undying conviction towards investing in bullion like Gold and Silver, for a major reason since bullion has the support of tangible asset usable by the bearer and the psychological "can't hit zero" concept.
Similarly, with the ETFs its easier to have a conviction for you know it will always trade at a proportion to the GDP and hence grow if the GDP does, vice- versa.
But, to make the entire strategy of investing a periodic sum in a single instrument a little more appealing let me introduce the concept of momentum investing. This way if you were to do a monthly SIP- viz investing a sum every month, you would be able to buy fewer units during an upward trending market while buying more during a downtrend. However, if you were to buy a fixed quantity- you would invest more in an uptrend and less in a downtrend.
Considering, that an investor did invest in the markets this way you would have not only survived the 2007/2008 GFC, the liquidity crisis in India post the IL&FS Issue, the recent crash around the Covid-19, but also consistently made returns. Without losing your sleep over it.
#Disclaimer: Equity investing risky please consult your adviser before making any decisions. Do not rely on any of the above calculations, before taking an investment decision. The above post should not be misunderstood as investment advice and is being posted strictly for educational purposes. May be invested in the stocks discussed.