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

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Lumpy returns

Posted by Muthu on January 4, 2017

“Gains won’t come in a smooth or uninterrupted manner; they never have.”- Warren Buffett

We keep revisiting basics periodically. This is just to refresh our mind and reinforce certain points.

I mentioned yesterday that look for 3 year averages in debt funds like MIPs and look for 5 year averages in equity oriented funds.

This is because in market linked products the returns are lumpy and not linear.

I may be holding a stock which does not move anywhere for 3 years and double in 4th year there by providing annualised returns of 18% over a 4 year period. Nil returns for 3 years can be very frustrating and doubling in one year can be very exciting. The 18% returns is a result of enduring 3 years of frustration and one year of excitement.

Though this is only an example, lot of stocks behave that way in reality. The gains comes in a very short periods of time in a lumpy manner. To get that return, one has to stay invested for the entire course. As I said, it is impossible to time such ups, downs and periods of going nowhere. So being in the market all the time is the only way.

You might have got 9% annualised return in a MIP over a 3 year period. This 3 year period may contain a year of no returns or less returns or even negative returns. Why I’m reemphasising this is, unless you’re ready for this lumpiness, you won’t do well as an investor.

As Morgan Housel mentioned in a piece, Apple has multiplied by 60 times during the decade ending 2012. Still it went down on nearly half of the trading days. If you’re an investor in Apple and worried about it’s falling days (which was as much as it’s rising days), you would have lost the opportunity to generate 6000% returns.

By trying to time the ups, downs and periods of going nowhere, an investor would be able to generate superior returns. Many try and some even succeed. It may be possible say for top 5% of investors. But all of us cannot be in top 5%. Many who try and fail may even end up in bottom 5%.

By definition, most of us can aim to generate only average returns from the market. By discipline, patience and staying invested, we would be able to avoid ending up in below average category. Since not all investors have the above traits of discipline and patience, we may also end up being above average.

Right behaviour would ensure that we rise above average and do not fall into below average. As I always say, all our effort is to ensure this right behaviour.

One Response to “Lumpy returns”

  1. E.Shanmugam Ekambaram said

    Excellent and Very educative. Wish you Happy New Year 2017. service to people is service to God. E.Shanmugam.

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