Tough road to 10% portfolio returns

Isn’t the topic itself so stupid?  An advisor saying even a 10% return is tough to achieve.

Well to attain a 10% compound growth rate it will take some beating and the reasons why I say that are:

  1. Proper investment planning is all about asset allocation based on risk behavior and not many clients are comfortable looking at negative returns on the overall portfolio
  2. Equity cycles are becoming shorter as India in now closely knitted to the world markets and every event now impacts our markets
  3. The return expected from Debt is also moving downwards from what it was couple of years back. The interest rates are cooling off and the Govt has been able to maintain its fiscal target. Even if the rates move up back, there will be immediately negative impact on debt holdings and therfore managing more than 8-8.5% will be tough
  4. Real estate, generally speaking is on a weak footing and will find it difficult to even beat the FD returns in years to come. However smart investors may still be able to find deals which can produce higher returns. The definition of ‘smart’ here will be based on exits and not entry into the investment
  5. Clients also do not understand the fact that equity portfolios cannot be based on 1-2 years scenario. While one may be lucky to get returns in short periods, there is no guarantee of the same
  6. Equity market returns are slaves of corporate earnings and for last 5 years we have seen lot of difference in forecasts and reality
  7. Fundamentals tend to catch up with the markets sooner or later and exuberance and sentiments cannot sustain the markets for too long
  8. There is more noise on ease of transaction and cost of advice rather than quality of advice and portfolio strategy, which I feel is detrimental to the investor experience and the portfolio returns as well
  9. India still doesn’t seem to be getting the kind of flows which were expected from FII’s and the main reason is the transparency in numbers. There has been lot said about the new GDP numbers which are said to be false indicators and true GDP is much lessor
  10. Retail participation in Equity markets remains a concern and therefore huge dependence on FII flows, which makes us very vulnerable to short term reactions across the globe
  11.  There is still overhang from the returns of 2003-2008 which I feel is a era where the world order was much better and Indian economy on a good footing. Some errors made then are still hurting our economy.
  12. The index has delivered less than double digit returns in last 5-7 years and the calculation based on these returns suggest that with 8% on debt and 12-15% on equity, huge amount of risks will need to be taken to achieve any return higher than 10%

I am not trying to dissuade people from investing into equity. In fact I believe equity should remain the best asset class for the next decade. My only endeavor is to highlight the fact that since all monies cannot be invested in equity, getting a 10% portfolio return should be the first objective of every investor and then look further from there. On a 100% equity portfolio the standard deviation can be beyond the risk appetite of many.

If you are being shown a rosy picture of 12-15% p.a., please check the volatility you can be exposed to and see if that is the situation you want to be in. Life in investments is all about Risk Adjusted returns.

Happy Investing!