What would have been the Sensex return if investment was in the Diwali of 2008? For this time period, the Sensex delivered a return of 14.54%, much above the 10% return noticed for time horizons of three, five and seven years.
Taking stock of the investing progress at regular intervals is a practice which every investor should undertake. All times are good times to review as long as a schedule of the review is maintained and followed. Discipline is what is called for. Diwali is also a good time to review the portfolio.
Let us take a look at the returns delivered by BSE Sensex since Diwali of 2007. Typically, as an investor we are biased towards recent returns generated by the portfolio. Can’t help the ‘Recency’ bias.
Returns across time periods
While the Sensex returns from last year Diwali is around 8%, it has been a roller coaster ride this year. A lumpsum investment of Rs 1 lakh invested in the Diwali of 2017 is Rs 1.08 lakh, a return around 8%. But then a one-year return assessment for a long-term investor with milestones is only one of the benchmarks. Typically, one does not associate this kind of return in the equity asset class.
Now, let us look at the Sensex returns since the Diwali of 2015. An annualised return of 10.61%. In that case the portfolio value was Rs 1.35 lakh for a holding period of three years. Again, if you have been told that the equity will deliver returns in excess of 18-20% consistently, then you are in for disappointment. But if you are one of the investors who has a tempered outlook towards returns, then you are not disappointed. And if you have been an investor, who has been investing purely for returns without looking at goals and milestones it is time you revisit the investing process.
And what about the Sensex returns since the Diwali of 2013—a five-year period? Again, only a return of 10.5%. What this means is on an investment of Rs 1 lakh, the portfolio value is Rs 1.64 lakh.
Is 10% the new normal when we are talking about equity returns.
Let us now look at the Sensex returns since the Diwali of 2011—a seven-year period. And again the annualised returns are 10.61 %. The initial investment of Rs 1 lakh has slightly doubled to Rs 2.02 lakh. Again if you notice, the annualised returns are in the range of 10%. All of the above returns are based on BSE Sensex returns and it has been a buy and hold approach, without any intervention.
Typically, in real life, it does not happen in this manner. As an investor you could redeem the investments, when the markets were going south. Or alternatively, you could actually increase and buy more of the holdings. Both the above actions, will have an impact on the investor’s return trajectory.
And what would have been the Sensex return if it was in the Diwali of 2008? This is when both the global and Indian markets were going south and sentiment towards equity was negative.
For this time period, the Sensex delivered a return of 14.54%, much above the 10% return noticed for time horizons of three, five and seven years. The investment of Rs 1 lakh is nearly four times. The portfolio is Rs 3.89 lakh.
In similar periods, the returns generated by large-cap , mid-cap and small-cap are higher, but again, the volatility is also higher. Can you stay with the volatility.
One also needs to understand at what point of time one is investing. If, instead of Diwali of 2008, the investment period was Diwali of 2007, the investment value would have been around Rs 1.85 lakh. A measly return of 5.76%. But this is not the end. The data points are only for us to decode and go ahead in the investing journey.
(The writer is managing partner, BellWether Advisors LLP)