Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Time over Returns

Posted by Muthu on November 18, 2014

I was speaking to someone last week who asked me if equity funds can double money every two years. Converting this to rate of returns, he was asking if he can get 41% annualised returns.

You know what would have been my answer. I said that what he can expect in the long run is around 18% annualised returns and the best what equity funds as a category has provided over last 17 years is 22.6% (CRISIL study).

There are 2 key components in compound interest formula – r and n; ‘r’ being rate of returns and ‘n’ being the time. What everyone wants to focus is ‘r’ which is not under our control and not focus on ‘n’ on which we have absolute control.

Steps to wealth building are

  • Start early
  • Invest regularly
  • Invest for long run
  • Stay the course without timing the market
  • Get wealthy

Every Rs.5000 invested monthly for 20 years @ 18% annualised returns would provide you Rs.1.17 crores. So 50K invested monthly for 20 years would provide you a corpus of Rs.11.7 crores. If you are willing to give time for your investments, 18% annualised returns itself would do wonders. If you are lucky to get the past fund performance of 22.6% (mentioned above) for the next 20 years; 50K invested every month would provide you…. hold your breath…. Rs.23.54 crores.

Going by long term nominal GDP growth, let us stick to the assumption of 18% annualised returns. We would be very lucky if we can get this return for next 20 years. Let us hope it happens.

Focus more on time on which we have complete control than returns which are controlled by markets. Focusing on what we can control would give us confidence and conviction. If we focus on what we cannot control, it would only make us anxious and impulsive. Anxiety and impulsiveness would ensure that we do not stay the course. If we don’t stay the course without disruption, getting wealthy would be an unrealised dream.

From now on focus only on investing regularly and staying invested for long term. Ignore the ‘r’ and focus only on ‘n’. If you do this with deep conviction, you would see a miracle happen. For those staying focussed, investing regularly and for long run; markets would reward you with good rate of returns. Markets tend to reward patience and long term conviction. It is difficult not to get good returns if you are a disciplined investor with a long term focus.

Always remember, it’s ‘n’ over ‘r’; time over returns.

7 Responses to “Time over Returns”

  1. Nishanth Muralidhar said

    Patience and persistence, even in the face of adversity , does wonders

  2. ajay said

    Dear Mr. Muthu,

    Asset allocation is one item missing in the above list. AA makes a big impact to your portfolio volatility and returns.

    Regards

    Ajay

  3. Dr. Viraj Shah MD(ped) said

    Dear Mr. Muthu,

    Let me congratulate you for your excellent articles which are in simple language yet to the point .I eagerly await your post in my mailbox.Hats off,sir….Bravo….!

  4. Manoj Kumar said

    Good article. The crux to understanding the time and return issue is that in the compound interest formula ‘n’ is exponential while ‘r’ is at the base. Therefore increasing the time is a higher multiplier effect than increasing the rate.

  5. Ganesh said

    Good Article. I think you have taken compounding frequency as Monthly. Is it not better to do compounding frequency as Yearly just to be on safer side? your thoughts on this will be helpful

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