Equity investments: Why near-term returns should not be your benchmark

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Published: October 25, 2019 12:46:16 AM

So the question to be asked is: Can the investments in the asset classes (equity/ fixed income/ gold/ real estate/ unlisted companies, etc.,) help in reaching the goals and milestones set ?

There are seven instances where the one-year return has been in single digits. And surprising there has been 13 such instances where the one-year return has been over 20%.

The last 18 months have been very volatile for the equity markets, which has upset many investors, especially first-time equity investors. The returns on the portfolio are not encouraging. Be it equity mutual funds or direct stocks, only a select few have been able to smile looking at their equity portfolio.

If you are a first-time investor in equities, the thought of beating a retreat would have naturally entered your mind. And quite a few would have actually exited and taken a loss. At the same time, one investing in bank fixed deposits, government of India bonds or short term debt funds would have had a smiling face, as in a few cases, the returns would have been in double-digits for the investment holding period of over two months.

Trust in data

As we begin the investing journey and continue on this journey, we need to look at the data and respect the data.
Let us look at the data of the BSE Sensex from 1979 to March 2019 ( taking into consideration the yearly return benchmark ending in a financial year).

In fact, 40 years have elapsed since 1979 and in these many years, there have been 13 instances where the one-year return has been negative. There are seven instances where the one-year return has been in single digits. And surprising there has been 13 such instances where the one-year return has been over 20%. Now, if you have stayed invested in the entire journey, the average return is over 20%, for the entire duration of the journey. But then, the shift towards equity investment has been gradual and there has been a bigger acceptance to invest in equities in the last decade and more so in the last five years.

If we look at the rolling three-year period , the instances of negative return is only 16% and the instances of return in excess of 20% is close to 30%. With every increasing holding period, the instances of negative return is reduced. For investment holding period of over 10 years, the rolling negative return is only in one such instance.
As a human being, bias is one important element which along with Emotional Quotient plays an important role in an investor’s ability to achieve good returns.

Recency bias

The recency bias is one bias, which effects the wired brain of an investor. The measures announced by the finance minister on September 19 gave a boost to market sentiments and the BSE Sensex and Nifty moved upwards strongly, making investors happy. Then again, after a month, the portfolio did not continue to rise. So, the cycle of discontent continues. How, as an investor, can we continue to achieve the returns? Can we reframe the above question in line with our needs and requirements.

An investor needs the returns to achieve the goals and milestones set. So, the return on investments is a medium to reach our predefined and / or moving goals over multiple time horizons. Some of the goals can be of a shorter duration (0-3 years) and others a medium term (3-7 years) and the rest for a period over seven years.

So the question to be asked is: Can the investments in the asset classes (equity/ fixed income/ gold/ real estate/ unlisted companies, etc.,) help in reaching the goals and milestones set ?

The answer lies in the question itself. Equity, which is a volatile asset class, is more suitable in the bucket of 3 – 7 years and /or over seven years. Then why are we looking at near-term returns of less than three years as a benchmark . We need to question our reasons for investing and look more at goal-based investing rather than return based investing.

The writer is managing partner,
BellWether Advisors LLP

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