Dearest investor and friends,
How are you all doing? I hope you & family are safe & sound.
In March 2020, when we had a market crash due to Covid-19, there were many people & articles talking about Market under-performing Bank Deposit Returns in the last 10 - 15 years time-frame. And this was INFACT TRUE.
So if this was true, are Bank Deposits really better Instruments than Funds or Equity? Are the Returns really better? Then how come, the wealthiest people and most financially independent people invested in Markets?
I call this - THE ILLUSION OF RETURNS !!!
Recently, I was reading slogans like "Stock Market Sahi Nahi Hai" or "Mutual Funds Sahi Nahi Hai" etc. You would be surprised to also note that, I received hundreds of emails during that time, asking whether SIP should be stopped or whether we should exit all the stocks in loss. People started talking about Importance of Selling in a Downmarket etc. Comparisons were made to the Great Depression. Whatever we read, it was Negative.
But a very few of us were encouraging everyone to continue investing in Markets and in Mutual Funds in-spite of returns looking crazily bad. Why were we giving this advice during those times? Why?
I was just looking back at some of my tweets in March. It was so much fun to see that every tweet was received well and we all faced the crash together and came back stronger. Love you all for that.
Also, I got some tweets from few friends saying that their investments have not yielded the returns they were looking for. Why did they not get returns? Is there something really missing? I call this - Illusions of Returns.
Today's article will provide you a much needed perspective.
Compounded Annual Growth Rate (CAGR) or Internal Rate of Return (IRR) is perhaps one of the most less understood terminologies and also, the most misused. In a Fixed Instrument like Bank Deposit, it doesn't fluctuate much. But, in a dynamic Market Based Instrument, the beauty of CAGR/IRR is that it can be made to look really good or really bad, based on the start & end point of the calculation. So, we can feel Really Bad or Really Good based on when we look at it.
Before we begin, please take 10 minutes to read through this article to get a basic understanding of CAGR. Click here to read. If you have not clicked this link, please do. It will be worth your time, before you continue.
As we are all aware, the Stock Market is never Linear. It moves up & down daily. And that what makes Market an easy target for Fluctuating Returns. I keep saying that, in Stock Market, Returns Fluctuate Daily, Value Doesn't.
Assume that on Jan 1st 2010, Kiran started a SIP (monthly Rs 10000) in the following instruments. She knew that RD would give around 5-6% and hence decided not to invest in a Bank Deposit. This is what she did:
She decided to invest monthly in 4 different Mutual Funds - Large, Mid, Small & Index (Rs 2500 each). Here's a small Table for us to refer while I communicate the message.
NOTE: I have taken average Real Funds for this Table (I don't want to Name). Focus only on the Message & the Essence. Try this for your own Funds and see how it co-relates.
She reviewed her Investments Regularly but didn't Churn at all. She did not change her Funds. She Stuck On. In Jan 2019 (after 108 months), she noticed that her Return was around 11% - 19% (across 4 funds). She was Happy. She continued. In March 2020, the Market started Collapsing. She checked her Return. It has down gone to 8%. She didn't Stop.
In April 2020, her return was almost 0%. Oh my God. She was Devastated. She had absolutely No Returns. It was as good as just putting her money in a Locker at home with 0% interest. She lost all her hope. Her total investment was exactly the money she had put.
Everyone Laughed. Twitter was full of Jokes against Stock Market. People were Laughing at Long Term Investing. There were commentaries that people should just Sell everything and never Invest in Markets Again.
But, Kiran had great Friends. She had an Amazing Association. She ignored the Trolls. She Didn't give up. She continued her Investment. In Aug 2020, her return is above 6%. She is confident that in the next few years, she will definitely Reach Her Goals.
So, to Summarize:
- Bank Deposits are always Better in the Short Term. I always say - Never Invest Something in the Market which you need in the Next 15 years.
- Taking CAGR below 10 years, according to me, is Misleading. This is because of the fluctuating Nature of Market Instruments. Please keep this in mind.
- When Market Fell drastically, the returns diminished to almost ZERO. Just by NOT STOPPING Investing in Bad Times, the Returns became better as Market Picked Up.
- As Indian Growth Story is Always Intact, the Trajectory is always UP in Long Term. Question is - Are we Ready to Look Beyond Small Time-frames? Can we look at Decades instead of Quarters?
- Association Matters. Absolutely. If we are in the Right Circles, we can Take the Right Decisions. And we can Avoid the Wrong Decisions.
- Have Reasonable Expectations. In an environment where Interest Rates are going towards Zero, the Goal should be to Beat Inflation and Meet all our Goals. If the Expectations are Reasonable, we will Not have the Pressure to Beat Someone's Returns.
- Today, there are Rockets Flying everywhere. Do not get Carried Away. People are looking at 3 month returns & extrapolating. Be Calm. Composed. Stay Long.
- If we can manage Returns of over 10 - 12% over 15 years, that means we are doing Really Well. Focus on the Amount Invested, Time Horizon. Returns will Follow Automatically. Don't Despair.
I sincerely hope that the point is clear now. So next time, if someone says that something is Sahi Hai or Not Sahi Hai, let us use our own wisdom to evaluate.
So friends, Enjoy this wonderful Journey. Keep going. You Can !!!
Let's enjoy what is in store for us. Downturn or Uptick, let's chill.
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Love,
Fundamental Investor
