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Do you want to create wealth from compounding? Aim for 12-15% returns and not 25%!
You must be thinking why not target 25% returns? Well, here is the story.
There is a typical cycle for most of the investors in the market. The most convenient and traditional investment options are FDs and real estate. When any FD investor wants to create a mutual fund portfolio, they expect returns slightly better than FDs.So if the FD is giving 7-8% returns, the expectation is to generate 10-12% returns over a diversified portfolio in the long term with low volatility.
At some point, the market enters a bull phase with sharp upside rallies leading to irrational euphoria. These investors hear stories of their friends, colleagues, and other people in their circle making returns above 25% in the short span whereas their well-diversified sturdy portfolio is generating only 15%.
Envied by these selective stories, they believe only they are not making as much money as the people in their circle are making. The FOMO grips them and makes them feel uncomfortable. That’s where things start getting complicated. Just to catch up and be part of the rally, these investors ignore the risk and increase their exposure significantly to risky assets which by the way are available at very expensive valuations (owing to high past returns). The portfolio risk goes up from low to very high.
They enjoy initial success with market momentum but like any other asset class cycle, the day of reckoning comes when the stock market tanks sharply. The portfolio losses run into lakhs/crores with more than 50% decline. Horrified and in panic, many such investors take out money at heavy losses and put it back in FDs.
These are the stages: Starting with getting 7-8% returns on FDs/RE -> creating a diversified portfolio with low risk to generate higher returns -> getting restless due to peer performance -> increasing portfolio risk at high valuations to generate excessive returns -> incurring heavy losses -> go back to FDs/RE generating 7-8% return.
Whereas, an investor who sticks with the discipline of generating 12-15% over the portfolio, doesn’t witness significant downside during the market crash and continues to enjoy higher returns over the long term.
This is the story of a significant number of investors learning a very expensive lesson in every stock market cycle of greed & fear. Quoting George Santayana, “Those who do not learn history are doomed to repeat it.”
Never ignore the risk in the portfolio. That will only ensure your longevity in the stock market. As they say, The Secret to Longevity? “Just Don’t Die!”
Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.
