Most kids coming home from their exams don’t expect anything less than a First Class. Parents don’t expect anything less than their ward getting into the IIT’s of the world. Investors assume that they can easily generate returns that would put even Warren Buffet at his prime to shame.

On Twitter, experts for most of the time seem to showcase how great their stock selection / trade selection was – look at how the stock bounced right off the support. Fundamental biased investors generally are eager to show how easy it was to know that the stock was a fraud, post the event even though when the stock was actually doing far better than the market, there are few sane voices questioning the same with data.

When the market was running up in the years prior to 2018, Mutual Fund managers were more than happy to show how great investing is. Now that the Large Cap Index in itself is still doing good but stocks have crashed, the excuse is that it’s “darkest before dawn”.

The reason investors aren’t able to stay the course is not because they are greedy or lack discipline but because they were misled on the expectation of the returns they could achieve for the risk they took.

Thousands of home buyers today have either paid or still paying for houses that may never be delivered. They weren’t greedy other than being dreamy about owning their own house – they were misled when it came to the risk they took when they signed on the dotted lines.

On the very long term, markets have gone up and hence if you keep investing, you will do well is the mantra of every analyst in town.

Take a look at the chart below – this chart is the Total Return Index of S&P 500 since 1871. The growth is just amazing with hardly any drops.

But the reality wasn’t so easy queasy. Can you see the small dip during the early 1930’s? Well, that was what is today known as the great depression. A famous pic from those times

By the time, the low was made, the Dow was **down a preposterous 89% from its peak**. US hadn’t seen a crash of that magnitude before or later. Yet, the Index recovered and those fortuitous to be holding on to the survivors would have made it back. But do we really expect ourselves to survive such a carnage without a change in the way we invest?

While the Bombay Stock Exchange is the oldest stock exchange in Asia, we don’t have data on stock prices of historical years. Sensex which is the bell weather index came into life only in 1986. Since 1986 to today, the Compounded Growth rate has been 13.50%.

To make that 13.50%, you should have been able to participate in the Sensex for the last 32 years and going through long periods of negative return. In other words, you would have been required to be a Saint. Of course, all this is theory since there was no easy way to participate in the Senex other than to construct the same on your own in the same weights. The first index fund came into life only in July 1999.

Acclaimed Guru and Stock market expert, Ramesh Damani recently gave a talk with the clickbait topic

“How to make 100 crore by investing 10 lakh: Ramesh Damani”

He talks about the huge advantage of starting to invest early and has the following side

Staring to save early is good but does that really provide the edge. There are two things worth noticing in the slide – One, the period of Savings and two, the small number at the last which says “Interest Compounds at 15%”.

Sensex has compounded at 13.50% and since this doesn’t include Dividend Yields which can come to 1%, 15% seems pretty much achievable. But does the static convey the real picture?

While I don’t have data on Sensex PE in 1986, in January of 1991, Sensex was trading at trailing four quarter price earnings ratio just below 10. We have seen this low a number only once post 1991 and this was in 1998. Neither the crash of 2000 nor the crash of 2008 brought down the market to such a cheap level.

Ramesh seems to have taken the 15% number from Sensex of the past 30 years. But the larger question is whether the last 30 years is representative of the next 30. No one knows how the next 30 – assuming you are saving for your retirement will generate.

But was Karishma really able to out-perform Kareena? Lets run it through real Sensex numbers to see how they performed. Remember, Karishma saves for just 7 years while Kareena saves for 27 years. If both invested in debt yielding 15% CAGR, this holds true – but markets don’t give out 15% or even 13.50% returns year on year.

Since we have only 33 years of clean data, lets give Karishma the first 7 years (1986 to 1992). For Kareena, we shall start investing in 1992 and invest till 2017. So, how do they fare by end of 2018?

Karishma has invested 50 thousand for 7 years which is equal to 3.5 Lakhs. This is now worth a fabulous 1.58 Crores – in other words, her investment has generated a XIRR return of 14%.

Kareena started off in 1993 and invested until 2017 for total investment of 12.50 Lakhs. Her current value is a mere 70.50 Lakhs. XIRR comes to 11.50%.

So, what happened. How did Kareena beat Karishma even though she invested for a longer period and through multiple bull and bear markets? **Is this all the magic of Compounding?**

The reason is simple – from when Karishma started to invest till date, index had a CAGR growth of 14.13%, for Kareena this number comes to 10%. In other words, much of the difference can be accounted by the timing.

Karishma started to invest when Sensex was around 500 levels and ended her investment when Sensex was around 2500. For Kareena, the start point was at 3350 and ending at 34,000.

Since both of them investe in the same instrument, we can get a better understanding by looking at how many Sensex units Karishma got for her 7 years of investment and how many years it took Kareena to accumulate the same.

Karishma over the seven years accumulated 440 Sensex units (Investment divided by Sensex). Kareena was able to accumulate just 195 Sensex units over her entire investment.

It’s similar to someone investing 50 thousand in Eicher Motors when it was a small cap stock versus investing 50 thousand when Eicher became a large cap. Return generated by the early investor is tough to match. As the adage goes, the early bird get the worm.

Personal Finance blogger, M. Pattabiraman had a very interesting video where he showcases how timing can influence returns for SIP’s.

Mutual Fund SIPs will not work without luck!!

Given what we now know and understand, what then should one have expectation of returns. Let’s assume if you were to invest a sum of money with a horizon of 10 years, what expectation you should have at the end of 10 years.

A lot depends on where you invest, but for simplicity sake let’s assume that you invest in a large cap fund that shall mirror Index returns.

Lets start with a much smaller time frame than 35 years – 10 years is seen as Long Term and if we can get things right in this time frame, we may as well have a chance to get things right on the longer time frames as well.

For this analysis, I shall use Nifty 50 weekly data which starts in mid 1990. Using weekly gives me more data points than monthly and hence better granularity. What is the range of returns we have seen for a period of 10 years?

The answer is that it can range between a **negative 1.60% to a positive 20.28%** with average return being 11.65%. That range of returns is just too wide to use it for figuring out how much can we get for our investment ‘n’ years later.

Here is a chart that plots the data (n = 959).

### How to read the chart?

The chart showcases the percentage of weeks where investment would have yielded the returns as shown in the Horizontal (x-axis). To get a better measure, you can simply cumulate to the bar you think is the return you need and subtract the same from 1. This is your probability of getting such a return.

So, the probability your return is greater than -1.58% will be 99.69%, the probability that your return would be somewhere near 20% is 0.52%. If you were to take a view of a coin toss, the 50^{th} percentile so as to speak will lie at around 13%.

While just blindly investing in a growing market will at some point of time provide you with strong positive returns, the inability to project the same can hamper our ability to stay the course. When we are hit with draw-downs, the last thing we calculate is that if the current return is well within the overall bell-curve of returns possible.

Assuming that 6% is the minimum returns we wish to generate from equity, what were the historically bad years to start a 10 year investment in Nifty 50?

We had 156 weeks where investing would have yielded a return of less than 6% after 10 years. The worst years to invest were 1994 followed by 1993 and 1992. Compared to this, 2007 / 08 which too makes a presence was a walk in the park. Investing in almost any day of 1994 and greater than 80% of the days of 1992 and 1993 would have generated returns below 6%.

Comparatively, just 7 weeks of 2007 (bunched around November and December) and 2 weeks of January (first couple of weeks) were the worst weeks.

As much as we think we know the future, it’s one thing to know and quite another thing to live through the same. Draw-downs take a toll not just in terms of money lost (notional or not) but also has a massive impact on our confidence.

The great Stephen Hawking was diagnosed with ALS when he was 21. This being a non-curative disease, Doctors at that time gave him a life expectancy of 2 years. He lived for 53 years more.

In an interview to New York Times magazine in 2004 he said

**“My expectations were reduced to zero when I was 21. Everything since then has been a bonus.”**

From Warren Buffett to Rakesh Jhunhunwala to Ramesh Damani, I doubt anyone invested with intention of using the proceeds at the end of ‘n’ year for specific purposes. Having zero expectations from your investment in markets can be tough, but if you were to accept that, the task of becoming a better investor becomes easier for nothing the market throws at you will impact you negatively.

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