The Illusion of Return on Investment

In March 2020, when we had a market crash due to Covid-19, there were many people & articles talking about Market are under-performing, Returns from Bank Deposits in last 10 to 15 years of time frame..

So if this was true, are Bank Deposits really better Instruments than Mutual Funds or Direct Equity? Are the Returns really better? Then how come, the wealthiest people and most financially independent people invested in Markets? That’s where there lies THE ILLUSION OF RETURNS..

Post Markets Crash in March 2020 we came across many words like “Stock Markets Sahi Nahi Hai” or “Mutual Funds Sahi Nahi Hai” etc. And people everywhere saying Stay away from Stock Markets & Mutual Funds, many 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 Bear Market. Comparisons were made to the Great Depression, Whatever we read, it was all Negative news..

But very few of us were encouraging everyone to continue investing in Direct Equity Markets & Mutual Funds in spite of negative returns post March 2020 crash. Why were we giving this advice during those times? Why??

Also, many keep saying that their investments have not yielded the returns they were looking for. Why did they not get returns? Is there something really missing? That’s where there lies THE ILLUSION OF RETURNS..

Compounded Annual Growth Rate (CAGR) or Internal Rate of Return (IRR) is perhaps one of the less understood terms & also the most misused. In Fixed Instruments like Bank Deposits, it doesn’t fluctuate much, But in a dynamic Markets 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..

As we are all aware, the Stock Market is never Linear, It moves up & down daily, And that what makes Stock Markets an easy target for Fluctuating Returns. I keep saying that, in Stock Markets, Returns Fluctuate Daily, Value Doesn’t..

Few Key points to Remember:-

1) Bank Deposits are always better in the Short Term, Never invest something in the Stock Markets which you need in the Next 5 to 10 years.

2) Taking CAGR below 5 years is misleading, This is because of the fluctuating Nature of the Stock Markets.

3) When Stock Markets fell drastically, the returns decreases to ZERO or NEGATIVE. Just by NOT STOPPING & Investing in Bear Markets, the Returns becomes better as Markets go up.

4) As Indian Growth Story is Always Intact, the prospects is always UP in Long Term. Question is – Are we ready to Look beyond Short Term Gains? Can we look at years instead of Quarters??

5) Association Matters, Absolutely. And if we are in the Right Circles, we can take the Right Decisions.

6) Have Reasonable Expectations, in an environment where Interest Rates are moving towards Zero, the Goal should be to Beat Inflation and Meet all your Goals. If the Expectations are Reasonable, we will not have the Pressure to Beat somebody else Returns.

7) Do not look at 3 months or 6 months returns. Stay Calm, Stay Composed, Stay Long.

8) If we can manage Returns of approx 15 percent over 10 years, that means we are doing really well. Focus on the Amount Invested & Time Horizon, Returns will automatically follow, Do not be in a hurry.

So BE FEARLESS. Do not time the Markets.

Keep a strong mind, Keep up with your patience level. Start investing for yourself. It’s the best gift you can give it to yourself at this particular time. Remain invested for long period of time. Keep Buying, Hold on if already invested. Don’t create & spread panic.

No matter what happens, we will beat this too the way we have beaten all of them in the past.

Last but not the least, ONE WHO HAS THE COURAGE & PATIENCE TO STAY & INVEST IN BEAR MARKETS, CAN HANDLE EVERY SITUATION IN LIFE COME WHAT MAY.