Whenever I talk/write about the stock market and mutual funds, I get a lot of flak about how “discouraging” or “negative” I am. Even after all these years, I find it bizarre that despite the disclaimers and the warnings, people believe that simply staying invested in the markets will guarantee good returns. And I am criticised for merely the truth.
I have explained this with data via many articles in the past.
- The stock market always moves up in the long term, but returns move up and down!
- Long-term investing in equity comes with no guarantees of success!
- Equity may beat inflation, but that doesn’t mean you will!
The gist of the articles is that history tells us that stock market returns are uncertain. However, over long enough investment durations, there is a reasonable chance that the market will beat inflation (whatever inflation is when measuring the return).
The market has no obligation to give you the return you want. So, if you want high returns, you are more likely to be disappointed. A chance is not a guarantee. The hope of the Indian economy growing is neither a strategy nor a guarantee.
People get angry when hearing about this simply because they have led themselves to believe comforting lies, such as if you stay invested for the long term, you will undoubtedly create wealth.
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So they get angry at me. The most common criticism is that you say we must invest in equity, but on the other hand, you say there are no guarantees.
The first part is a necessity, and the second is a reality. Investors will take a while to appreciate that this is not a contradiction.
We must invest in equity, but we must also not blindly believe that investing alone is enough. We need a risk mitigation plan. How do we go about this?
- Time is essential to manage equity risk. This is why they say equity is only for long-term investments.
- Asset allocation is crucial. There is no more than 50-60% in equity for goals over 10 years away.
- Periodic rebalancing with a specific goal target is essential to reduce portfolio volatility.
- Systematic reduction in equity exposure is needed to ensure we have enough money for our goals, which is far more important than returns.
Long term investors must have a solid systematic risk management plan by gradually de-risking their equity exposure. Our research – explained in the goal-based portfolio management course and incorporated into the freefincal robo advisor shows that this has more than a reasonable chance of success regardless of market conditions. This is also explained here: do not expect returns from mutual fund SIPs! Do this instead!
Being positive about the market will not fetch us returns. We need a good risk management strategy. To state the obvious that market returns are not guaranteed is not an attempt to be “negative” or “discouraging”. It is a caution to have a risk-mitigation plan in place.