Was just reading a report by one of the world’s leading consultancies and they were talking about a lower return expectation from the equity market. Of course they were hinting a rise in interest rates.
For a moment let us forget why, but accept that equity returns will be subdued over the next few years. How should you react?
What should you do if returns from equity are going to be lower over the next decade or two?
a) Earn more b) Spend less c) Invest more d) Improve the discipline
All of them sound difficult, boring, or OMG not doable. Right?
Well. If you have been getting 12-18% cagr on your equity assets, you have been doing well and depending on the ‘n’ or the number of years, you have created wealth for yourself. However now YOU are convinced that the next few years the returns would be in the region of 9-11% p.a So you are bracing yourself..Here are some of the things you should do…..or not do.
- Remember the world is full of snake oil salesmen! The BFSI compensation system has made it impossible to get good quality advice at a fair price. See how much a good doc charges vs how much a salesman charges. And gets away. So learn how to do financial planning while searching for a good financial planner. A good guy with tons of experience is worth his weight in gold. I seriously do not think I wish to recommend anybody. Not that I do not wish to, but I do not know enough fin advisers, and as a serious pro I refuse to stick my neck out. Learn the process of financial planning. Once you know how much assets you have and what is your asset allocation it might become easier to deal with a lower return from equity. I see many oil skin salesmen using interest rates of 21-18-15…for projecting returns. Some of them have changed recently, but do not get carried away. The last ten years Equity returns have been so smooth that we have become complacent. Be aware.
- Be ready for other asset classes: If you have about US $ 1 M or more be ready to invest in other asset classes like private equity, venture capital funds, peer to peer lending, commodities, real estate, etc. Also think of outside the country investments – US, Europe or Asia funds. However this asset class should not be more than 10-15% of your funds. Take the time to do your research so that you feel comfortable with the risk/return profile of each alternative. Adding non-traditional asset classes will not necessarily lead to better performance depending on the mix selected, but this strategy is likely to provide a smoother ride (lower risk or lower volatility) for investors.
- Reduce your expectations and do not chase returns! When returns from one asset class reduces it is human nature to look for other asset classes. So if equity returns come down from say 15% to 13% don’t believe financial advisers who keep saying…’markets will go up’. Markets may find a new level. Also with inflated equity assets, dividend yields and future returns HAVE to be subdued. Its sheer economics.
- SIP is not the cure for all illnesses. SIP in equity is also risky – it is ONLY reducing the risk of equity investing. It is more a psychological tool and not so much a SAFE strategy as people make it out to be. So be careful while choosing funds.
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