A few years ago I rounded up 10 friends and asked them to gjve a hurdle rate that their investment should give.

Most of them had 8% for debt instruments and an amazingly fantastic range of 12% to 40% when it came to equity. Some of them BELIEVED that real estate HAD already given about 24% return over the past 40 years.

I then destroyed these myths with real life examples.

Then I asked them ‘How much do you think is the inflation in your own lives’…again they had no clue. However, since I had included the husband and wives, there was some hope. 3 of them had maintained an expense diary, and they knew what they were spending on. The so called finance knowing men had no investment diary and had NO clue on what returns they were getting on their investment.

So suddenly the numbers started flowing…vegetables were going up at 12%, but had a big seasonal variation.

Education was not well recorded – the fees was going up at about 12-14%, but the ‘projects’ etc were perhaps going up faster.

Eating out was also not well documented and the range of places where they were eating varied from 5* to clubs.

Vacations, again not too well documented, and a constant upgrade was happening.

Medicines and doctors were costing a bomb – 18%, BUT that included 80 year olds, operations, small children.

So even in one family there was no great ‘like’ comparison.

Clothes too were poorly documented, and there was no buying pattern, but was not really bothering anybody about inflation. I guess organized retail had helped here. Petrol and car maintenance was easier to track.

So suddenly all of them said OUR HURDLE RATE HAS TO BE ABOUT 14%.

None of them had more than 30% in equities or INVESTMENT REAL ESTATE. One of the guys had 2 factories which could be called investment real estate, but all the others had only one residential real estate. One of the couple had 2 houses of which one was being used by their parents who were in their 80s. However this was not really an investment real estate.

I said :

Hurdle rate of 14% is nice to talk IMPOSSIBLE to achieve on the full portfolio.

The only known asset that has got this kinda return was equities. However I mean direct equities, not MANAGED equities, where the only certainty is costs.

All of them HAD TO DRAMATICALLY pump up their equity component.

All of them HAD TO save a much, much larger amount, invest very smartly, and make sure that there was NO CAPITAL LOSS. This combination was absolutely essential, not to get rich, JUST TO ENSURE that their corpus lasted longer than they did. The only alternative was to die early.

I can go on and on….and I wish there was a nice smart personal finance institute that would do all such kinda research all over the country. We will have some authentic data across various strata of society, age groups, etc.

If ‘headline inflation’ is 11%, EITHER your CORPUS HAS to be huge, or your lifestyle SIMPLER…because YOUR hurdle rate should be 15%. That is like DON. – ‘Pakdna mushkil hi nahi, na mumkin hai’….lol..

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  1. My personal inflation rate over last 11 years is 16%.
    Monthly expenses in Jan-2005: 15,000
    Monthly expenses in Jan-2016: 75,000

    We’re soooo totally screwed…

  2. My personal inflation rate over last 10 years is 18%,
    Simple living high thinking and Keep doing SIP,that’s the only mantra

  3. I think once income source dries up, lifestyle will be adjusted according to income. Indians usually live within their means.

  4. This post is a mathematical post saying ‘if inflation is 18% as nitin says, what amount of hurdle rate should your portfolio give. We will all live within our means – tell me other than begging what is the choice if u have finished your money?

  5. sir you have to account for stage of life a person is in.
    also compare income growth versus expense growth
    if income growth is higher then ok

  6. Thanks subra. I began reading your blog two months back & as you suggested i have read Intelligent investor by Ben Graham ,based on which i have started investing in equity via SIP in Nifty index. The facts & figures you produce are very very helpful. Thanks once again 🙂

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