The weed trap of seeing a single data point about stock returns and what you can do to escape it

If an equity fund is recommended by an advisor, distributor or friend, what is your tool to assess its past performance (bearing in mind the caveat: past performance may or may not hold up in the future) ?

One way is to check the single entry point of the data, considering maybe X years as returns, right? And there’s nothing wrong with doing that. But then, in bullish markets, all numbers would look good, while in bearish markets, not all numbers might look good.

What returns would you choose then? You can try to analyze the multiple periods of a year, also called rolling returns. Choosing just one particular return or day for future wealth creation/preservation is not only choosing a practical frame of reference, it is also financial hara-kiri. Wouldn’t you rather choose as many frames as possible before taking a call?

How about a long term return then?

A fund‘s stellar or mediocre performance in the short term will strengthen or depress long-term returns, respectively. That said, over the very long term, in most cases the gap between the rolling returns of shorter mandates between bull and bear markets is very wide; however, the divergence between the longer-term rolling returns of bull and bear markets is much narrower, if not equal.

For those who are in the accumulation phase: when you invest, for example over a period of 30 years, how is a period of 30 weeks or 30 months relevant for your portfolio? Of course, this is about your emotions which only arise when your own money is invested. A long-term return, for example, perhaps 10% or 12%, is always misinterpreted as an annual return of 12%, when in reality the fund experiences many swings from large positive returns to perhaps negative returns to produce an average of 10% or 12%. or whatever that number is over a very long period of time. Intellectually understood but not internalized!

Asset allocation is useful if it is tailored to your personal situation. Assuming that fixed income securities are not doing as well as equities in bull markets or vice versa, asset allocation can help offset the gain or loss.

We welcome good returns but avoid volatility, which is the cause of good returns for those who adopt it.

The path to consistent wealth creation and protection is to establish a financial plan or at the very least have a meaningful investment goal, tailor your asset allocation to your situation and not that of your friend, then return to the instrument/fund selection. A periodic review should be made to see if your portfolio requires course correction based on your circumstances.

Finally, instead of focusing on what the index or fund has been doing in the recent past, it would be useful to check how we reacted to the last peak of the bull market and the nadir of the bear market? In other words, have we given in to our greed or our fear?

Opinions are personal: the author – N.Vishwanath is the founder and CEO of Blue Ocean Financial Services Pvt Ltd

Disclaimer: The opinions expressed are those of the author and are personal. TAMPL may or may not subscribe to the same. The opinions expressed in this article/video in no way attempt to predict or time the markets. The opinions expressed are for informational purposes only and do not constitute investment, legal or tax advice. Any action taken by you based on the information contained herein is your sole responsibility and Tata Asset Management will not be liable in any way for the consequences of any such action taken by you. There is no guaranteed or assured return in any of the Tata Mutual Fund schemes.

Investments in mutual funds are subject to market risk, read all plan documents carefully.


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