I got a call this morning from a reader saying –

My wife looked at my portfolio and said ‘You have been generating a CAGR of 0.36% in the past 3 years – why are you in equities at all?’

So he said : If i had kept this money in a bank FD, I would have got 7-8% p.a. ….so I repeat my wife’s question.

Here is what I said…but first the caveats…

a. To me it does not matter if you buy equities, debt, gold, petrol, horses, slaves, or NSEL contracts. It is your call. If you are right you make money, if you are wrong, you lose money. Completely your call.

However one assumption is that as a family you will want to increase your net worth over long periods of time. Though there are many people who love destroying family wealth, like all idiotic Economists I will assume that my assumption is right.

Now for the answer:

First of all I am happy that a woman takes interest in the financial affairs of the family – there is some application of mind. This also means that the husband does communicate what he invests, his log in, password, …..which is an awesome attitude towards investing. That itself is good.

Now there are many reasons to be in equity – one of them being that if you had tasted blood in 2003-7 you are likely to linger on for the kill. Well, if you are not a good stock picker you can watch the market go up, and your portfolio go down. A significant number of players have missed the 10% rise in the past 10 days. Ouch. That is one years return in the debt market. Gone. Vamoosh.

The fact that you were not in the market during the steepest rise can hurt you far far more than staying in the market during a bad period. Ha, sorry, that is too damn technical perhaps?

What i told the caller was: Equity markets do not have average returns because the Standard deviation is too damn high. I gave him examples of Shahid Afridi and Rahul Dravid – both names that I remember from my cricket watching days (last week I realised that my cable operator does not give me the cricketing channels – when a friend asked me) …

So if you had missed being in the equity market in 1992 you would have missed a 260% rise. Also if you had missed being in the market in 1993 you would have saved a 43% FALL.

The equity markets will give a 83% return in one of the 5 years starting 2014 – trying to be in the market ONLY during that year is NOT possible. So your job is to wait around for that to happen. In the meanwhile if you can trade to reduce your costs, do so, like I do. If you CANNOT, stay invested…