2.21 crore individual demat accounts were added in April-November 2021.

– Economic Survey 2022

The financial year 2019-20 witnessed a monthly average of 4 lakh new Demat accounts being added . Scores of retail investors around the country now have easy access to investing avenues thanks to simplified tech-based investment platforms, a robust regulatory environment, and the government’s drive towards digitization. In some sense, we could call it a retail investment renaissance.

Context aside, the novice investors added in this boom, can we call them ‘new investors’ or mere traders whose eagerness to jump in and invest can easily be attributed to the buoyant stock markets? Only time can tell.

Are you an investor?

The true litmus test lies in a Time Test. The stark difference between investing and trading is seen in the time horizon of the investment. Trading requires far more calculative moves for every invested penny. Its strategies involve an in-depth understanding of market cycles, a keen eye on market movements, and the ability to decipher what factors will affect a specific investment. Trading aims at gains from short investments made from quickly investing in fluctuating markets. The strategy involved here is daily, monthly, or quarterly short-term investment to reap better and quicker gains.

On the other hand, an investor uses time to his advantage with a long-term strategy. This strategy is incorporated to minimize the effect of market fluctuations on investment in the short term. The idea is to ride out any downtrends and avoid being swayed by short-term volatility in the markets. Comprehensively speaking, long-term investments require patience, consistency, and control.

Patience: It takes time.

Patience is key to any long-term undertaking. Short-term volatility and the noise in the market often spook novice investors and deter them from staying invested. While investors may pull out of investments with moderate gains in the short term, they will lose out on the long-term benefits that compounding has to offer.

Compounding is the fundamental wealth creator for investors who stay invested and continue to reinvest their gains. The longer the investing period, the greater the returns. The earlier one begins investing, the sooner their money begins to work overtime, and the faster one can achieve financial freedom. Therefore, as a prudent investor, it is critical to take advantage of the power of compounded returns and begin investing early and regularly.

Which brings me to my next point.

Consistency: It takes persistence.

Persistence is one factor that could help long-term investors remain consistent with their investment and ride the waves of volatility with ease. Investors who lack the discipline to stay invested systematically could choose the SIP route. It is one method of ensuring you invest steadily and periodically. SIP additionally offer the benefits of shielding you from the pitfalls of short-term investing blunders, short-term market risks, and above all, the impulsive, emotional reactions to the extreme volatility that could derail your set investment plans.

While consistency is key, persistence is the route to achieve it.

Control: It takes due diligence.

In a long-term approach, an ‘invest and forget strategy’ rarely works; it is as good a bet made in a lottery ticket—the lack of control over where, when, and what you invest in could lead to poor investment decisions. However, overdoing the opposite could bring with it its complications. Obsessing over your investment choices or tracking market movements incessantly could lead to decisions based on emotional triggers. Even a simple basket of investments like mutual funds and ETFs made without due diligence of the underlying securities held could lead to risks of lack of diversification or over concentration of assets in a specific sector or stock.

Another crucial element is risk assessment. Failure to understand your precise ability to absorb risks could lead to serious financial crunches in times of market downturns. Investing is a full-time activity, and hence most investors prefer outsourcing it to professional fiduciaries.

It is easy to get swayed with the noise in the market.

It is easy to postpone investing to a later date.

It is easy to take a quick irrational decision because it worked for a friend.

But it is not easy to stay committed to a course and ride the waves of volatile markets. But, that’s what it takes to have an investment mindset.