Equity returns: How much should you really expect?
My client was very happy with his portfolio returns. Over the last two years, he had made a cool 30% internal rate of return (IRR).
“We should invest more in equity, let’s get aggressive… Invest more in small cap funds as it had delivered the highest return," he explained.
When we first met,he was a conservative first-time equity investor who had agreed toinvest a small part of his portfolio in equities only after a good deal of persuasion.This was only two years back, and the change in his perception of risk since then has been remarkable.
He is baffled that I used an 8% CAGR for calculating retirement corpus and thinks he will get there faster by being “aggressive". He is not alone. The bull market is leading investors to believe that the returns from equities in the last few years will continue forever.An old advisor friend lamented that new investors have no idea about risk, while the old have forgotten what risk is.
Every new client's portfolio contains red flags of excesses; if you see them in yours, you might need professional help.
New portfolios look like an assortmentof funds with overlapping holdings and no direction or strategy. Investors hold too many thematic, sectoral and smart beta funds and are clueless about risks and payoffs. Having multiple advisors/platforms and dozens of SIPs is routine.
Additionally, investors make tinyand irrelevant allocations to NFOs and ETFS. Irrelevant because the allocations are too small to impact portfolio returns significantly. Anything over five to six well-diversified mutual funds is excessive and needs pruning. More is not better in the case of mutual funds.
While small and midcap funds have done very well for investors, valuations in these are at historic highs. SIPs
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