‘Subra you may be skeptical but I am sure that equity will give 19% p.a. return over the next 25 years”

‘Why should my client invest in equities if he cannot EVEN GET 18% p.a. returns over the next 20-30 years”

‘Why are you saying that what has happened over the 40 years will NOT happen over the next 30 years..see the Sensex returns”

Well I meet many fund managers. Problem is they come disguised as IFA, sales managers, relationship managers, bank rm. and I am unable to tell one from the other. I recently addressed a bunch of IFA with a big AUM..and I heard the above statements there. Seriously, I have no answer to offer.

Going forward, what rate of return can we expect from equity? Well to answer this you might think that to predict share or bond returns like a Dalal Street strategist at the Divali special program on TV, you need to mutter obscure incantations over an Apple laptop, wearing fancy clothes and spewing out long equations bristling with Greek letters. You may think that you need to spew a few 4 letter words like Ronw, Roce, …etc. Hello, hello, but what if simplicity beats complexity?

When a client asks of course, the best answer is ‘I do not know’. However you need to understand that the market is a slave of EPS and PE. So if you can start with the current dividend yield (say 1.9% for the share), see the expected growth rate – say 10% p.a historically, and then the growth in the PE depending on the mob frenzy – the combination of these 3 elements will give you a decent indicator of what the equity returns will be. If you are willing to sit tight over a long period collecting the dividends (reward for sitting tight over long periods!) you will end up with a decent number. (of course not original, this is the formula suggested by Mr. Bogle in his book)

The other way of seeing what returns one can expect to get from equity is to work from the debt return – say currently about 7% – equity returns have to be at least at a 30% premium to this – about 10.5%. Add another 2% for growth over and above the market growth for the good quality companies that you pick. The sensex can grow at a premium to the over all market – economists view – not mine. This should put equity returns in the region of 12-13% range. I do think that we should be very very lucky if we can see this figure over the next few years. Trying to guess the return number over extremely long range of time is hazardous or irresponsible.

Now both these figures that you have arrived at are nominal rates. Reduce the projected RBI target inflation rate of about 6%. That brings you to the expected equity return of about 3-4% or the REAL return. Even this may not sustain (in India) beyond a couple of years as in 2018 we will go into an election mode for 2019 general election.

It takes more than a gentle push to tell the IFA that the past decade performance of the Sensex was equal to GoI 10year paper – so the equity premium WAS missing. Now tell me why that can happen over the next 10 years…and then again 10 years?

Hence the best answer…..’I do not know’. If your IFA knows and you believe him, it is time you learnt to invest direct. Because..the more such junk you hear from him, the more overconfident you become. Overconfidence leads to over trading, and over trading leads to broker prosperity and your portfolio under performance is GUARANTEED.

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  1. i will stick to my 11-13% return expectations – and take whatever i get…on my trading portfolio last year I had a 40% return and I have no clue how much luck, skill and how much of God’s grace.

    My life is done with a 4-5% return, but I like the equity market play, so will be there. For me risk is being out of the market..and I will be in the market for another 20 years…and then shift to mutual funds – more like an index etf

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