A long bull run has made huge returns seem normal. Time to curb your enthusiasm.

First, you must consider the historical annualised returns of the Nifty Smallcap 250 over longer periods – 7-20 years – as super-high returns tend to moderate over time. Take the case of an investor who started investing in 2009. According to Capitalmind, the returns were as follows: 111% in the first year, 58% over two years, 17% over three years, 23% over four years and 15-22% per annum from year seven onwards. The same is true for the Nifty 50 and Nifty Midcap 150 indices, in which initially high returns of 50-100% per annum dropped to 15-20% per annum from years 7 to 20.

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Also, even 7-10 year SIP returns tend to fall over the years. For instance, the 10-year returns from Nifty 50 fell from 22-23% for an SIP that started in 2000 to 12-15% for one that started in 2011.

Why realistic expectations are important

Investors are often lured by the average returns over short periods and base their expectations on these. This is especially true during long bull runs, which cause investors to forget about market volatility and become overconfident.

Unrealistic expectations can cause you to miss your investment goals. Say you started an SIP in 2007 based on a fund’s 30% compound annual growth over the previous seven years. The next SIP return for the next seven years was only 9%. In such cases, not meeting your target could cause you to take a rash decision to get into stock trading or futures & options. According to recent data from Sebi, a majority of traders and F&O investors lose money. 

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Data that looks good on paper doesn’t take into account human behaviour. Returns are not linear – it’s normal for markets to months-long or even years-long drawdowns. For example, the smallcap 250 index delivered negative returns in 2018 and 2019 after a great year in 2017. People tend to pause their investments if such slides continue for more than a couple of months, and this reduces their long-term returns. As Howard Marks said, “The important thing to remember about investing is that it is not sufficient to set up a portfolio that will survive on average. The key is to survive on the low ends.”

Focus on the input, not the output

Expectations of high returns tend to make investors focus on market movements rather than their actual goal, which is to create a large enough corpus. A smarter way of investing is to focus on the amount you can invest. This is in your control and can increase the probability of success. 

Assume a person invests ₹20,000 a month and gets 15% annual returns while another invests ₹30,000 a mont and gets 12% returns. After 15 years the first investor will have ₹1.35 crore and the second investor will have ₹1.5 crore. The second investor ends up with a larger corpus even though his returns are lower.

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Trying to grow small amounts into big sums often causes investors to lose money as they take on more risk than they should. Instead, you should aim to increase your SIP installments every year. In the example above, with a 10% annual increase, the first investor ends up with ₹2.20 crore and the second investor with ₹2.60 crore. Clearly, focussing on the amount invested and looking to increase it every year is more reliable than chasing high returns.

Many investors have normalised stupendous returns thanks to the long bull run for Indian stocks. But it’s time to curb your enthusiasm and set more realistic expections for equity returns – 10-12% a year at best. Remember Warren Buffet’s words, “I don’t look to jump over seven-foot bars, I look around for one-foot bars that I can step over.”