Every year has some lessons to teach in your life, for me It was the reinforcement of certain basic concepts and why those concepts are ever green. In 2017, equities market had a wonderful run in India as well as globally. There was a cheer all around, Large cap returned around 30%+ returns while Mid/Small Cap returns were ~50%. This made lot of people happy and others to start looking out for the funds giving such phenomenal return. People started pouring their money in Small/Mid cap funds as their first choice and in 2018, when they are showing negative returns, they end up being on a losing side once more.

I purposefully wrote once more because we all have the different approach in our investment life vs any other aspects. In my life as a student and then as a teacher, I have seen 4 main categories of students: Category A are those students who always want to achieve best or do their best in academic life, Category B students takes studies as part of their life balance it with other activities, Category C only aims to do minimal effort to pass the exams and Category D does not care but gets pushed by others to pass. Though in our financial life, we all strive to be the best or in Category A. People do not want to pass the financial exam but pass it in flying colors. When we make money on our investments, we are unhappy because we did not make the most & when we lose money, we are anyways unhappy. This is where we fall victim to the herd mentality and start chasing the best return providing investments.

Is this easy to find a best return generating investment?

The simple answer is no because If it was, we would have left with only one asset class which always and consistently generates the best returns. Rest all asset classes would have stopped existing, which is practically not possible as well as not healthy for the overall investment market.

Imagine you have only equity market then people will invest in companies which generates high RoE, so practically all the utility companies or Metal/Mining companies will not find any funding to grow to meet with growing future demand. We will not get enough supply of essentials like power, water, agriculture or oil etc in future, because people will only buy Facebook/ Amazon’s of the world. We would need to have debt for companies who might not give high RoEs but have a good regular cash flow or companies/business where the time lag between investments and returns can take longer periods.

Can we have at least consistently performing asset class?  

Consistent performance can mean two things; Either regularly generating best returns or giving regular returns. We already established that one asset class consistently generating best returns is not good for overall markets/ economy, you can also check the returns by asset class for last 15-20 years to realize that each asset class keep moving from best performer to worst performer over the years as shown in below chart (Link to source).

asset returns

Other option is to stay with the traditional asset class of Fixed deposits, Post office schemes which gives you assure returns. They do suffer from the problem of value erosion due to inflation (The Story of Middle class investors) or are too slow. In my experience over last 1 year since I wrote the steps of calculating one’s retirement corpus (Know your Retirement Corpus), I am yet to find a person in their 30s who need less than 5-10 Cr corpus for their retirement after 20 more years. If we stay with traditional asset class generating 8% returns, we need to invest INR 85k per month to build the corpus but if you can increase the returns to 10% you only need to save INR 66k a month and @12% this is INR 50k. Therefore, the choice is ours If we want to stick to consistent return generating asset, either we need to save more or work for more years otherwise take some risk.

In Long term, Equities outperform so if I am investing for long term I can stick to equities?

Some people will put a brave face and say this but in truth no one like to see loss on their portfolio at least on a yearly basis. One of my friends, an ardent equity lover and a long-term investor, while I was doing asset allocation for him, it took some time for me to convince him to invest in Gold (which obviously not performing for last 5-7 years). After his investment the Annualized return on gold has been >+50% while his equity investments are all in red zone. Now the question I am facing that why I did not allocate more to gold 😊. The main point is if you can withstand the occasional losses, you can stay invested in equity for long term but be careful and plan for withdrawal to preserve your gains. You do not want to see market shrink by 50% just 4 years before your retirement & out you 10 years back to your goal.

What a common investor should do?

We should aim to be a Category B/C student, returns are part of investment game but not the end objective. Our end objective is to achieve the financial freedom and grow our wealth in a manner which is acceptable and do not impact our financial well being. Below are the steps I suggest:

  1. Know your end objective, retirement corpus and plan its accumulation at a reasonable growth rate of say 10%. For example: Person A needs to accumulate 5cr in 20years so need to save INR 66k per month towards this objective
  2. Track your yearly progress, your aim is to hit the yearly number. If markets have been kind you might overpass the budgeted number vice-versa you might lag the budgeted number.
    1. You might get some buffer if markets are kind, you can maintain the buffer to avoid any squeeze in future, but you can keep a cap like 10% above the budget post that use the extra return for the joys of life for which you are making money. Buy the car you dreamed or go for a holiday for your financial success etc
    2. You should try to squeeze for extra saving to hit the budgeted number, if required
  3. Stick to the asset allocation (Asset allocation) which assures you of some returns every year. It is OK to let go high returns vs avoid any large losses. Change your asset allocation with the help of your financial adviser or get your strategic asset allocation assessed for long term and follow the same
  4. Be happy every year when you meet your target wealth.

In my experience in the starting few years of investments, your savings will form majority of the portion for your wealth growth and the growth will be faster while slowly after few years your returns on investments will start to surpass your annual savings. That’s when you start to see your money making more money than your effort in your job/business and you have become an investor than an employee/businessman.

Wish you a very wealthy and prosperous 2019!!

Happy Investing!