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

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Easy to understand, difficult to follow

Posted by Muthu on October 2, 2016

We keep repeating that patience and staying the course are critical requirements in building the wealth.

Time and time again, we give real life examples to reinforce this point.

There is a fund by name ‘Voya Corporate Leaders Trust’ in existence from 1935 in USA.

It has completed 80 years of existence.

This fund is holding the same set of companies since 1935. It invested in 30 leading US companies equally in 1935. After that it has not made any changes to portfolio except for automatic corporate actions like merger, spinoffs, bankruptcy etc.

Currently the fund holds 22 companies.

I read that $10,000 invested in this fund on Pearl Harbour Day (7th December 1941) would have become $18 million now. This implies an annualised return of 10.5% over last 75 years.

10.5% may not sound very appealing. As we always say, you need to look at real rate of return. Real rate of return is nominal returns adjusted for inflation. During last one century, the average inflation in US is around 3%. That gives you the real rate of return of 7%+ for this fund.

In India, the long term returns from equity is around 16%. The average rate of inflation has been around 8%. So we’ve got a real rate of return of 8%. When inflation becomes 4%, if you get 12% return from equity, it would be equal to 16% return of the past.

Some say they got FD returns of 14% 2 decades ago. Getting 14% return when inflation was 12% is no great deal. It is same as getting 6% FD returns, when inflation is 4%.

So Voya corporate leaders trust return of 10.5% over 8 decades is a great thing. Who would have got these returns? I’ll share a Buffett quote here:

“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president.”

Investors and their generations who stayed the course patiently despite all of the above would have got that returns.

We are not advising to buy and hold equity funds for next 8 decades. Portfolios do need changes depending upon performance and life situation. What we are trying to convey is that these changes should be as minimal as possible. Most of the time staying the course and doing nothing is the best thing to do. We are always there to suggest you changes as and when it becomes really necessary.

In good times it is easy to practice patience and staying the course. In bad times, it is extremely difficult to follow. Fear is such a strong emotion to derail the course.

By reinforcing these points continuously, we hope all you would be able to internalise and develop the required traits.

Staying the course is applicable in all situations except end of the world. But end of the world would happen only once and we would all not be there. So ignore repeated noises made by media every time there is a serious political or economic crisis that this is going to be the end of the world.

I hope this piece answers few of you who asked me whether to redeem all investments if there is going to be a war between India and Pakistan.

We know that this is easy to understand and difficult to follow. We are there to make you do the difficult job. Remember that what is difficult would be equally rewarding.

7 Responses to “Easy to understand, difficult to follow”

  1. dilip1202@yahoo.com said

    Very nice. But we need to have better portfolios, which will drop less in serious conditions you mentioned. How? Thx .

  2. 6 to 7% real return is a moderate return over a stretched and very long period of more than 8 decades.
    May be that when the fund started, very few companies were there (they all were into brick & mortar, industrial kind of category and not the new age digital businesses) and somehow this world has always survived even after some of the most fanciful hockey stick kind of return journey for some of the new age digital businesses.
    My view is in Indian context. In my view, one should expect a real return of 8 to 10% CAGR for an extended period of time in Indian context because of inherent risk involved in a democratic and diverse country like India with geopolitical risk also. From a managed PMS, one should expect 12 to 15% real CAGR return. It is all pre-tax.

  3. svp99 said

    I am investing in MF from last 6 years. Apart from monthly SIP I keep boosting my saving by adding intermittent lumpsums. I am very tempted to invest in stocks directly even though i have burnt my fingers in the past. I know that I can’t do the research like Warrent Buffet but I can go by ready made research by broker houses. What will be your advise shall i curb my temptation and focus on only SIP ? or take risk with limited money going by the calls given by broker houses.

    • Muthu said

      Please don’t go merely by brokerage reports. Look at them only as a source of information. Unless you are confident taking decisions and invest on your own, better to avoid direct stocks and invest only through mutual funds.

  4. Raju said

    Sir, so doesn’t it make the index funds to be the ideal choice for any investor (as great Buffett says). Of course it might be an era after the trusted fund managers like PJ, Naren etc retire. But I think the choice of an index fund and not touching it for decades will be better once a person is not able to manage on his own and do not able find great fund managers with long track record. This way at least he might never own junk companies as they might get out of index before that. please post your views.

  5. Sushant said

    I follow you on twitter and its great to read your twits everyday. They are awesome! Just a question as I’m not sure the type of holding you recommend e.g. top companies in nifty50 or else. How do you handle change in fundamentals that affect business activity of companies such as frauds, change in promoters etc.Thanks.

  6. Cliff Graham said

    Thanks ! I would like to learn more, please !

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