Sensex is at all time high…Sentiment is nearly the best../ Complacency is setting in…More money is pouring in..Future Return expectations are inching up…!!!!

While not so long ago we went through almost a so called upheaval in the country because of Demonetization. Pessimism/negativity ruled in everyone’s mind and result was witnessed in the market reaction resulting in huge Volatility with downward bias. Well such is the nature of markets..Isn’t it..?? It surely doesn’t like Uncertainty.
Zoom out a few more months/year, we had possibly all the events including Brexit, Fed Raising interest Rates, China Currency scare ,some European country or bank on verge of bankruptcy and what not..!!

But a very interesting observation in all this is how your return expectations also become volatile with all such events or market movements on either side!

Recently I met this gentleman (whom I met some 3 years ago for investments) in mid 50’s who wanted to invest some funds and wanted my advice on selecting mutual funds. As a normal practice and process, we meet to understand the client’s profile, his goals, his risk taking ability investment horizon etc. and then accordingly decide on the Asset Allocation.

This gentleman not to my surprise kept dodging my queries, answered partially and what I could make out that he had something in his mind waiting to burst out as soon as I finished. And there came the ‘infamous query’: Return kitna milega har saal??: Well a legitimate Query which has 2 parts to it..Return expectations and tenure.

Although I wanted some time to construct his portfolio strategy and comeback to him but before I could say he came up with another one, 24-25% toh milega na..my cousin had invested in this xyz fund.. they say 25% this fund generates every year..Money has doubled for him in 3-4 years. Aap batao kaunsa funds mein lagana hai..taking out his wish list of funds to invest.

Almost that split second I went back 3 years in memory when I met this same gentleman who after seeing the portfolio down by 40-50% in 2008-09 period vowed not to invest again and at least not be very greedy for returns.  Three years back our conversation on portfolio returns started with seeking returns that outperform FD’s/Debt etc. (approx 9%) by 4-5% margin if not more without taking unnecessary risk.

It (14-15% tax free) doesn’t sound exciting to most of people investing in equities as they normally chase past returns due to which their return expectations soar to the sky. One starts feeling that by taking more & more risks the returns are going to get better(looking only at rear view mirror/past performance) only to get disappointed in the future years. One gets complacent and general feeling is that this era of 24-25% returns will be there forever or at least for next 5-7 years with 3 years of similar returns already behind us. Remember markets don’t discount the present, they discount the future.

Managing expectations of returns plays a key role in avoiding panic and taking unnecessary risks. There might be periods of low returns (might not match FD’s) and high returns( >25%) but eventually these aberrations gets corrected and your revert to mean over a long tenure. (Of course you can outperform mean/average by investing low or exiting high which needs good emotional discipline and temperament with knowledge).

The better way to identify a target return is to work all the way through your- not to be compromised life goals (such as child’s education, marriage, health, retirement etc.) & other goals (such as car, vacations, gadgets, aspirational luxury items etc.) with time in hand to achieve them. Design a portfolio construct (Asset Allocation) depending on your short term/long term goals and follow it like a doctor’s prescription to get rid of the ailment. Of course during the journey one could realign the portfolio construct should there be any windfall gain, bonus, some asset sale or any unforeseen circumstances (covered for it under Asset Allocation.)

We all know for a fact that equities in virtue of itself is probably one of most volatile asset class but not necessarily risky if we don’t look at a very short term (may be 6 months – 12 months). subject to where we are invested within equities. That’s of course important but can be left for another time.

Happy Investing!!

Kunaall Milwani
SKU Consultants