Last Updated on May 22, 2021 at 11:13 am
Balaji asks, “Dear Pattu Sir, You have given proof over and over again that one should not expect any particular return from investing in mutual funds and that there are no guarantees, I have just started my mutual fund investment journey. May I know how much risk or loss I should expect? This will help me prepare for what I am up against.”
The typical question is “what return would I get?” Balaji question, though lacking in detail is most refreshing. We shall discuss loss from equity investing with some example asset allocations. Before we begin, the articles Balaji refers to are these: Do not expect returns from mutual fund SIPs! Do this instead! And What return can I expect from a Nifty 50 SIP over the next 10 years?
We shall use the same dataset and study used to understand the benefits of portfolio rebalancing. We shall consider a systematic monthly investment over 15 years into an asset allocation of 50% and the rest in debt. The NSE 500 TRI will represent “equity”. For debt, we shall consider two cases: the I-BEX gilt index and a simple fixed-income instrument with an annual return of 6% (let us call this FD). The portfolio will be rebalanced once every 12 months. We will consider 137 15-year periods from Jan 1995 to May 2021.
50% Equity and 50% Debt
To appreciate loss, we need an asset allocation. All metrics such as returns and risks should always be first considered at the portfolio level. The maximum fall from a peak for this asset allocation is 34% for equity + FD portfolio. That is, out of the 137 15-year periods tested, the maximum loss was 34%.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
That is the overall portfolio fell by 34%. If the portfolio was 100% equity then the max fall would be about 60%. A detailed study on different asset allocations will be published later. Please note: If an unredeemed loss is notional as some equity mutual fund salesmen claim, then unredeemed gains are also notional!
The median portfolio loss was 28%. The 137 data point set can be divided into two sets – the up half with a loss of more than 28% and the lower half with a loss of less than 28%. This is with rebalancing.
Thus if I hold an equity + FD portfolio with 50: 50 allocation and rebalance it annually, it would be better for me to expect a maximum loss of about 35% and typically losses would be 8-10% below this. Any loss lower than this, then I should consider myself lucky.
Loss in equity investing has two components: Decrease in value as discussed above and time lost. How long did the portfolio stay below a previous peak?
For the 50:50 equity + FD portfolio the max no of continuous months ‘underwater’ was 27 months! The medium no of months the portfolio was underwater: 18 months. This means we should expect the overall portfolio to be in ‘loss” for about two years!
Let us now compile the data for equity + FD and equity + gilts portfolio (50:50 allocation) in each case.
- 50% equity + 50% FD: Max Loss with rebalancing: 34%
- 50% equity + 50% FD: Median Loss with rebalancing: 28%
- 50% equity + 50% FD: Max Loss without rebalancing: 48%
- 50% equity + 50% FD: Median Loss without rebalancing: 44%
- 50% equity + 50% FD: Max time underwater with rebalancing: 27 months
- 50% equity + 50% FD: Median time underwater with rebalancing: 18 months
- 50% equity + 50% FD: Max time underwater without rebalancing: 31 months
- 50% equity + 50% FD: Median time underwater without rebalancing: 23 months
The benefits of rebalancing are quite clear! If we replace the fixed income with gilts, we get this.
- 50% equity + 50% Gilts: Max Loss with rebalancing: 31%
- 50% equity + 50% Gilts: Median Loss with rebalancing: 24%
- 50% equity + 50% Gilts: Max Loss without rebalancing: 43%
- 50% equity + 50% Gilts: Median Loss without rebalancing: 42%
- 50% equity + 50% Gilts: Max time underwater with rebalancing: 22 months
- 50% equity + 50% Gilts: Median time underwater with rebalancing: 16 months
- 50% equity + 50% Gilts: Max time underwater without rebalancing: 30 months
- 50% equity + 50% Gilts: Median time underwater without rebalancing: 23 months
It is a bit beneficial to rebalance between equity and gilts. Also see return results here: What are the benefits of portfolio rebalancing?
70% Equity and 30% Debt
Now the same data is presented for a portfolio with 70% equity.
- 70% equity + 30% FD: Max Loss with rebalancing: 46%
- 70% equity + 30% FD: Median Loss with rebalancing: 42%
- 70% equity + 30% FD: Max Loss without rebalancing: 55%
- 70% equity + 30% FD: Median Loss without rebalancing: 52%
- 70% equity + 30% FD: Max time underwater with rebalancing: 27 months
- 70% equity + 30% FD: Median time underwater with rebalancing: 18 months
- 70% equity + 30% FD: Max time underwater without rebalancing: 31 months
- 70% equity + 30% FD: Median time underwater without rebalancing: 23 months
The same parameters if fixed income is replaced with gilts.
- 70% equity + 30% Gilts: Max Loss with rebalancing: 45%
- 70% equity + 30% Gilts: Median Loss with rebalancing: 39%
- 70% equity + 30% Gilts: Max Loss without rebalancing: 52%
- 70% equity + 30% Gilts: Median Loss without rebalancing: 51%
- 70% equity + 30% Gilts: Max time underwater with rebalancing: 32 months
- 70% equity + 30% Gilts: Median time underwater with rebalancing: 22 months
- 70% equity + 30% Gilts: Max time underwater without rebalancing: 32 months
- 70% equity + 30% Gitls: Median time underwater without rebalancing: 30 months
Due to the dominant equity weight, the difference between FD and gilts have come down. Data for asset allocations will be presented soon.
In summary, an investor aiming to hold 50-70% equity in the portfolio should expect the portfolio to fall by 35-45% and portfolio losses to persist for 2-3 years. A large loss in time is due to a sideways market and a large loss in value is due to a market crash.
Only an efficient asset allocation plan with a proper de-risking strategy will fight these losses. If you have not yet done this planning, this is a good place to start: Basics of portfolio construction: A guide for beginners.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)