(Part 1 of the two-part 'On becoming rich' article series illustrated how making money sporadically doesn’t necessarily mean that your portfolio is compounding at a stupendous rate)
Most portfolios I have seen, have not compounded at even a high single digit number. A vast majority has compounded at 6 or 7 percent or lower -- not even a 9 percent or 10 percent.
Claims suggest that Indian markets offer opportunities for returning alpha (a measure of a superior performance, compared to a Benchmark – usually the Index).
Forget alpha, NIFTY has returned 11 times returns in the last 20 years (approximately 13 percent CAGR)
If you consider dividends, Nifty has returned about 15.5 times (approximately 14.5 percent CAGR) in the last 20 years.
You don’t have to grow at 20 percent or even 15 percent - Yes, I mean that.
First of all, remember if you want your entire corpus to grow at that rate, you need to invest your entire corpus in equities. American economist Harry Markowitz may shiver at that thought but let us say you decide to ignore the old man and do no asset allocation at all. (Trivia: The father of diversification, the Nobel prize winner, when asked where he invests answered – 50 percent stocks and 50 percent bonds.)
Could it be possible however, that deep down, you are shivering too? Most risk profilers I administer seem to suggest that people are not necessarily able to assess their risk tolerance levels accurately. Many clients call when the market goes through a rough patch wondering if they should cash out.
Second, not only do you have to be 100 percent in equities, you have to be right 100 percent of the times. Choose the right funds, choose the right stocks – tough one, you would agree.
No matter how much one tries, there will be mistakes, there will be behavioral biases, you may go in with a large sum of money (because you got a bonus) just before a period of under-performance starts, you may pull out (because there was an unforeseen emergency) just before a period of over performance starts.
There always will be some reason your portfolio could not grow at that superlative rate and I am saying that it is alright, because it does not have to.
Just like Hetal, my trader friend, many people don’t really know what they are talking about when they speak of what rates their portfolios are growing at. However, let no one tell you what rate your portfolio needs to grow at.
Your required rate of return should be determined by your risk tolerance, your life stage, and your needs.
At the end of the day, the following things matter:
» Have you arrived at a rate of return that works for you (remember, 10 percent compounded over 25 years makes your money grow almost 11 times i.e almost a 1000 percent returns)
» Do you know what risks you can tolerate? Are you avoiding the ones that you cannot?
» Are you driving your required rate of return for the entire corpus?
» If your income is rising at a steady rate, are you contributing funds towards your corpus?
» Finally, remember having a portfolio is meant to make you calmer, happier. There is no race to be won.
Your bonuses don’t depend on beating any benchmarks. You have the freedom to do what you understand and of not to do what you don’t yet understand. It really is, alright.
The author is the Founder of ABANWILL CONSULTANTS LLP, a firm that was formed to provide independent views on investing and make an impact in the field of Financial Services.
The thoughts and opinions shared here are of the author.
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