Stocks (and hence mutual funds) are often sold as something that give “assured” long term returns over a period of time. While this has been true for most of the times, and all time if we consider a long enough time horizon in India’s recent history but is this always true?
Can it be possible that stock markets can give lesser, say 10% returns over next 10 years? Or 5 percent annual returns? Or, taking inspiration from Nicholas Taleb, a black swan event happens and your end up barely recovering 80 percent of your principal amount (i.e. 20 percent loss) –
I am not a predictor of future, nor are thousands others who claim to have more than 1000% percent surety of future events.
So, if you are contemplating taking a personal loan @ 12% for some financial need and want to be invested in a mutual fund for “assured” 12 / 15/ 18/ 25 percent returns, maybe you need to rethink.
If you want to borrow money @ 12% just to invested in a mutual fund for “assured” 12 / 15/ 18/ 25 percent return, read the above point.
If you want to put all your investments in stock markets, check the allocations vis a vis debt. Possibly no harm in keeping most of your investment (or even all your investment, if you have that faith) in stock markets, but if you are taking debt to invest in market, I don’t think it is a wise option. This may even be a “virtual debt” like holding on top stocks but defaulting on credit cards due to cashflow issues.
If markets give, say 10 percent annualized returns over nest few years, will you be able to identify its peak (and convert to cash close to peak) or will it remain tied to your notional returns? What will be returns in this case?
(Of course, with returns like 15% or more, this question is unlikely to arise.)
Is past performance an indicator of future performance?
What are your thoughts?
Originally published here