stock news, World, mutual fund, economic News

- Advertisement -

Why bother with asset allocation if I have the appetite to bear market ups and downs?

A reader asks,  “If I pick any so-called large or mid cap schemes and if I check returns more than ten years, they have at least 12% CAGR and above. If my time horizon is above ten years and I’m happy with a 12% CAGR, can I stick to only one good fund and do SIP in that? If I have the stomach to digest the ups and downs of the market, why bother about so-called asset allocation?”

“This is all inspired by long term returns chart observations on various websites. So my only question is, can I stick to one fund for SIP for long years? In stocks, money has gone to almost zero, but not with MFs.”

Returns from mutual funds depend on “when you look”! This is known as timing luck. See, for instance: How the fate of your mutual fund SIPs is decided by “timing luck”

My retirement portfolio is proof of this: In May 2020, My retirement equity MF portfolio return was 2.75% after 12 years! Today it is 15%. Will I invest in 100% equity in the hope that losses will be erased immediately and, eventually, I will get a good return, or will I hedge my portfolio with ample fixed income? I choose asset allocation because my hard-earned money deserves more respect than decisions based on casual observations.

Many investors make this common mistake (thanks partly to effective propaganda by the mutual fund industry) and assume that long-term returns will always be “good”. There is no evidence to back this up. For example, the Stock market always moves up in the long term, but returns move up and down!

Even if we assume that your observation is correct (I won’t put any money into it), there is no guarantee that the past performance would repeat. Rember that disclaimer?! We can afford to ignore what the mutual fund industry says in large font. But what it says in small font, we must take quite seriously!

The biggest problem with Indian data is that it is young. Our market history is insufficient for long-term returns to show cyclic behaviour. For example, the 15-year Rolling SIP returns of the Sensex Price Index from April 1979 to Aug 2021 are shown below (taken from the above-linked study),

15 year Rolling SIP returns of the Sensex Price Index from April 1979 to Aug 2021
15-year Rolling SIP returns of the Sensex Price Index from April 1979 to Aug 2021

We are unlikely to see 25%- plus returns again because the market volatility has reduced since the Harshad Mehta scandal- Sensex at 50,000 – lessons from the 42-year journey. Also, see: Sensex return is 16% plus over the last 41 years, but half of that came from just three good years!

On 43 occasions, or 13% of total trials, the return was less than 10%. A single-digit return after 15Y has to be considered a “loss”, at least in the past, as it is not an adequate premium for the risk taken.

This 13% (or 0.13) is not a probability! It is just past performance. We cannot keep investing with hope and find out that after 15 years, our returns are poor. That is a risk we cannot afford to take.

Investing each month on the same date is not systematic investing. Regular investing and regular risk management = systematic investing. Learn more about it here:  Basics of portfolio construction: A beginner’s guide.

We need more market history to appreciate better why long term returns can go up and down. Using the Schiller PE data, we shall turn to the S&P 500 Total Returns index.

When we look at the 15-year rolling SIP returns data – there are 1279 such data points! – it is nothing short of extraordinary! The true cyclic nature of long-term equity returns is seen.

15 year Rolling SIP returns of the S and P 500 Total Returns Index from Jan 1900 to July 2021
15-year Rolling SIP returns of the S and P 500 Total Returns Index from Jan 1900 to July 2021

We only see an arm and leg of this cyclicity in the case of the Sensex because of its short history – meaning we have to be more careful about what to expect from stocks in the future. This is why we recommend against expecting returns from mutual fund SIPs and prefer systematic goal-based risk management based on asset allocation.

The 90% returns we say after the March 2020 crash in a year usually take 4-5 years or even more! Volatility is both our friend and enemy. Equity is essential to beat inflation like fire, but getting overconfident about it can burn you badly.

30 year Rolling SIP returns of the S and P 500 Total Returns Index from Jan 1900 to July 2021
30-year Rolling SIP returns of the S and P 500 Total Returns Index from Jan 1900 to July 2021

Also, although we say cyclic returns, we have no idea when the returns will peak and when they will start falling.  This is why investing and risk management has to be “systematic”. If someone asks what returns I can expect from equity over the next 10 or 15, or 30 years, the honest answer is, “we do not know; we cannot know.”. The best part is, we don’t need to know!

What should investors do? We must learn to stop listening to AMC hyperbole about compounding (see: Don’t get fooled! Mutual funds have no compounding benefit!) or market rewarding the blindfolded patient in the long run – sometimes it does and sometimes not. We will have to shift our focus from returns (which can fluctuate and are not in our control) to a target corpus for a specific goal (which we control better with a variable asset allocation)

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥

Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!

New Tool! => Track your mutual funds and stocks investments with this Google Sheet!

  • Follow us on Google News.
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Join our YouTube Community and explore more than 1000 videos!
  • Have a question? Subscribe to our newsletter with this form.
  • Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.

Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   

Our new book for kids: “Chinchu gets a superpower!” is now available!

Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.

Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!

Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!

Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.

Buy the book: Chinchu gets a superpower for your child!

How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!

We publish monthly mutual fund screeners and momentum, low volatility stock screeners.

About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)

Connect with us on social media

Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)


#bother #asset #allocation #appetite #bear #market #ups #downs

- Advertisement -

Leave A Reply

Your email address will not be published.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More