I was going through an American survey (India has no credible investor perception surveys) and I found real rich Americans expected their over all portfolio to deliver about 8.5% p.a. returns. Remove the debt portion yielding about 2.5% – and it means that the equity  shares in the portfolio has to yield about 13% p.a. This is a far cry from the American average of 7%p.a.! Institutional Investors are not much better off – they expect to beat the index by a mile, even though they have been under performing the index since 2000. The companies providing for pensions in their own books are willing to take higher and higher risks so that they can provide less in the current year for the future pension!

Why are people so optimistic when it comes to projecting the future returns from  equity? or even from debt?

There is enough evidence to prove that expecting higher returns is the surest path to disappointment! Of course we know that, just that our rational minds goes off to sleep when we make projections. We love to border on the fantasy land and hope that the fantasy will lead to higher returns. Lets face it, the Americans kept on making movies to show how they won in Vietnam, did they not?

The Americans have still not accepted that they lost in Vietnam, they used chemical warfare, they attacked women and kids – almost ditto in the Middle East and Afghanistan.

Similarly investors cannot face the truth – they just do not accept that the equity returns can be just 11% (Indian context). If they have to achieve their goals, they just NEED 19% p.a!! Guys n gals you are just setting yourself up for a big huge disappointment!

Now what will happen to Investors and IFA who read this piece? THEY WILL IGNORE THIS COMPLETELY because it is not in their interests to read “equity will return 11% p.a. for the next say 9 years”. It MEANS they will have to earn more, spend less, save more, and invest far more intelligently than what they are currently doing. Since all these are far more painful options, they will opt for the simple one – ignore this article and fantasize about a 20% p.a. equity returns and about 9% p.a. debt returns. This gives him or her a better shot at the goal. This is “information avoidance” – even if the data is available for free.

When you get information you like, you tend to use it. When you get information that you do not like, you ignore it. So if you need to do a SIP of Rs. 50,000 p.m for your retirement assuming shares to yield 19% why would you read this article and re work your SIP amount? Suppose the reworked figure is 78,540 assuming shares to yield 11% p.a., the conclusion is painful right? So IGNORE SENSIBLE DATA is something which people – including fund managers do REGULARLY. This is CONFIRMATORY BIAS!

So we will continue to do the following:

believe that we are smarter than other investors and will continue to outperform others (in our fantasyland of course)

believe that the shares that we have bought have gone down temporarily, and Reliance Power will soon reach Rs. 4000 a share!

we let our losses run deep and far, but will take our profits ASAP

What is wrong? Well, I do think that SIP returns on our portfolio is exaggerated, and we need to get realistic. After a bull run if we think that the next few years will be better is just a self fulfilling prophecy, and it will hurt us.

Wake up guys, EXPECT less, you will be happier today and later on too!

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

  1. Well said Subra. Expectation and Bias is a human behavior in many perspective through out the life. Managing is the one we as human need to do.

  2. But Sir, Morgan Stanley have ASSURED us that Nifty can EASILY TRIPLE!.. From 9500 to 30000 in next 5 years. That’s almost 26% CAGR! And my portfolio, consisting mostly of mid and small caps OUGHT to outperform it by atleast 10 to 15% like it has done in last 5 years! 😉

  3. Completely agree Subra sir. High expectations leads to unhappiness. Not only in market, but in general as well.
    One can do effective Financial planning only if worst case scenarios are considered in calculation.

  4. Bogle formala for expected returns on stocks is more appropriate.

    future returns= earningsgrowth+dividend yield(+ or- speculative return)

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>