There are many people who come to sell equity schemes…and here is the language they use:
1. Sir ‘Equities have given 20% CAGR in India from 1979 till today including dividends’ – so if you invest in equities for 5 years you will get the same kind of returns
Explanation: Equity returns have a very high standard deviation. This means if you dissect 33 years returns – the answers will be surprisingly different. So over 5 years you can get returns of 5%, 22%, 40% – nobody, absolutely nobody can promise any number close to the eventually correct figure. All numbers are only a guess work.
2. Sir last 5 years return has not been good, so the next 5 year’s return WILL be good.
Explanation: History does repeat itself, we just do not know how often! This is not a bad statement to make, but be ready for an unpleasant surprise. Equity returns have a lesser standard deviation over longer periods. This means it is easier to take longer periods and come to better conclusions. Still, at best nos. while talking of equity markets is still a guess.
3. Sir ‘This fund manager is hot”
Explanation: Ask him to sit inside his cabin with the airconditioning in full swing. Heat strokes kill.
My take on equity investing:
Historical returns are difficult to achieve. Very difficult. Reasonably good returns over long periods of time is not very difficult to get in an individual’s portfolio.
Remember all costs have to be factored in. A 2.5% amc DOES NOT make a fund a well managed one, just an expensive fund. The same fund it it had 1% amc charges – the impact would be dramatically different.
Have low expectations.
If you are getting 8% on your debt instruments, and you expect 40% p.a. in equity instruments, check your expectations. Obviously something is wrong with your EXPECTATION, not with the market. Remember at the beginning of 2012 nobody knew that equity returns in India will be double that of gold and far better than debt. QED.
What about 2013? No clue. Gold, Real estate, equities, debt….welcome to the world of asset allocation! Happy New Year to you
Source:Subramoney.com