At the end of every year people (especially writers of personal finance) create one chart showing the returns of various asset classes. If you are international then you make a chart consisting if Developed market equities, developed market mid cap, small cap, REITS, Bonds, etc. then Emerging market blue chips, Mid caps, Bonds, ..etc.

If you are India based you make only for India – large cap, multi cap, mid cap, micro cap, value cap,…..etc.

One thing is clear the leadership position keeps changing. We know that. And we do not know why there is no pattern. For the pattern seeking Homo Sapien this is very disturbing. But hey, I need to look smart so I come up with ‘it is now the turn of the mid cap’ or ‘now it is the turn of the large cap’ – just goddamn bloody guesses. Oops. It is a waste of time, at best. Extremely damaging and harmful at worst.

What we learn: Mean Reversion happens, leaders change.

What we MUST learn: We do not understand the pattern. We have no capacity to say ‘why it happened’, forget saying ‘what will happen next’.

Far, far, far more importantly, there is no reason why you should even try playing this game. It is not necessary, in fact not necessary at all.

Stick to your asset allocation: 70% in Giant and Large cap equity as the core. With the balance 30% you can try mid caps, micro caps, focused funds, etc. Do not disturb the core. Understand that your equity strategy will work in the long run. Remember some simple things – ‘average’ is not a normal in equity return. When you say average you need to know that there is an arithmetic average and a geometric average. You need to know that a reversion will happen.

You also need to know that if the long term average is 19, there may NEVER be a year of 19, but one year of 76 followed by 3 years of ZERO. Even worse it could be 3 years of zero followed by 76.

Investing is understanding all these concepts. Oops, it is applying these concepts, coolly.

Vipasana, and Gayatri Mantra chanting helps. Relax.

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  1. Thanks, I learnt a new thing today- geometric mean.
    Wikipedia did the explaining-

    And here is the main reason why one needs to know what is Geometric mean

    The use of a geometric mean “normalizes” the ranges being averaged, so that no range dominates the weighting, and a given percentage change in any of the properties has the same effect on the geometric mean.

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