Investment Objectives & Advice

Are you being fooled?

“A fool thinks himself to be wise, but a wise man knows himself to be a fool.” – William Shakespeare

There is an old proverb “Never ask a barber if you need a haircut.” still novice investors fall prey to various tricksters. Time after time the gullible investors have been peddled with stories about equity is the best asset class. It has been proven by so many studies and that if you don’t believe it or oppose it, People will call you fool. Let me remind you all an old tale “The Emperor’s New Clothes” written by a Danish author. Story is about two weavers who promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid, or incompetent – while in reality, they make no clothes at all, making everyone believe the clothes are invisible to them. When the emperor parades before his subjects in his new “clothes”, no one dares to say that they do not see any suit of clothes on him for fear that they will be seen as stupid. Finally a child cries out, “But he isn’t wearing anything at all!”. Are we fool if say that equity is not the best asset class or we are being fooled? Let us analyse the data and facts.

First let’s analyse the below table, it was published in the article run by Mint Newspaper in Dec 2019. It compared the yearly returns of various asset classes and sorted them based on returns, I could not find a consistent winner. If I think from broad categories of Equity, Debt, Gold and Real Estate, Then also Equity topped the chart 5 times, Gold 3 times and Debt 2 times. Are you surprised that equity is the best asset class only 50% times, so it is actually like tossing the coin?

https://www.livemint.com/money/personal-finance/with-no-consistent-winner-asset-allocation-ruled-the-last-decade-11577725402708.html

Secondly, The returns of equity are non-linear over a year you can get returns of +100% and money doubles as well as it can decline by 50% and cut to half. there are various possibilities of returns in between. The chart below shows the probability distribution of the same based on last 20 years of return distribution. If you can deposit the money in Fixed deposits @7% there is a 30% probability that equity returns might be lower than that.

Thirdly, they will paddle us with the deceiving but true data of returns between certain time periods. This could be returns since inception or last 7yrs, 10yrs etc depending on the points which suits them best. for example the return over 11 years since Mar 2009 to end of Feb 2020 has been fantastic 15.7% are you enticed? wait but the returns over 12+ years from Dec 2007 to Mar 2020 has been mere 3%. You can guess for yourself, which number is more frequently fed to you or they can show you the below chart that see the only way equities go is up with quote loss is temporary & growth is permanent :).

Risk/ volatility is the only thing sure in equity investing. If you want to be a better investor, you need to follow the 5 steps:

  1. Take as much risk as you can withstand based on your risk capacity
  2. Follow the Strategic or Dynamic Asset allocation to diversify your investments
  3. Balance your portfolio annually
  4. Avoid purchasing equities or other assets during high valuation zones
  5. Invest regularly: Equity, Debt, Gold or Real Estate but cash is trash

Happy Safe Investing!

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