Chasing returns is one of the favourite sports of all investors. They keep on finding new ways and means to win this game at any cost. However, during this chase they ignore following the rules of the game, as nobody else is following.
Like while driving, if few drivers jump the red-light, then most of the drivers start doing the same and think that it is normal to do that. These drivers forget that they are breaking the law and whoever will be caught will have to pay the price in the form of a penalty. You cannot escape the penalty by telling the policeman that you did that because everyone else was doing it.
Similarly, in the case of investments, if you are not following the basic principles, rules & guidelines of investing, then sooner or later you will have to pay the price for it. It does not matter if other investors fail or succeed, what must matter to you is just your financial success.
Each investor is unique in terms of their risk taking abilities, cash flow, financial goals, behaviour etc. Comparing their investment portfolio with someone else might derail them from achieving their investment objectives & goals. You might face trouble in the form of unachieved goals & stress.
It is not easy to keep ourselves away from following other investors. Portfolio return is the most common reason why investors start following other investors and forget their own financial planning. There may be various reasons for the difference in returns between two portfolios.
The major reasons why we misinterpret the portfolio are as under:
- Starting point of portfolios
- Investment manner
- Portfolio Composition
1. Starting point of portfolios
| Start Month & Year | Investment Benchmark | Investment Amount | Current Value | Date of Review | CAGR Returns | Absolute Returns | |
| Nifty 500 Multicap 50:25:25 TRI | ₹100,000 | ₹357,582 | 38.47% | 257.58% | |||
| Nifty 500 Multicap 50:25:25 TRI | ₹100,000 | ₹151,411 | 18.08% | 51.41% |
Looking at the table above, Investment A seems better than Investment B on the portfolio returns parameter. However, this is not the complete story and there is a lot which goes untold in the story.
Investment A: investments were done when the markets were at their long-term low in 2020 during the covid 19 market crash. This portfolio will show higher returns for a longer period. However, returns will average out gradually with time as stock markets do not deliver the same returns every year.
Investment B: in this scenario investments were done when the markets were not at their long-term low.
Suppose:
Situation 1: An Investor B who has done Investment B, meets Investor A who has done Investment A, or
Situation 2: Both the investments are done by the same investor but through different advisors.
In situation 1, when portfolios will be reviewed Investor B will think that his or her portfolio is not being managed properly, as the returns are lower than Investor A. Also in the situation 2, investor will think that the advisor who is managing Investment B is not efficient and investor will leave the advisor managing Investment B. Though it might be possible that advisor who is managing Investment B is far more efficient than the one managing Investment A.
Let’s look at the same investment scenario from a different angle:
| Portfolio A | Portfolio B | ||
| Investment Phase 1st | Investment Amount | ₹100,000 | N.A. |
| Start Date | 1 Apr, 2020 | ||
| Current Value 31 Aug 2021 | ₹235,887 | ||
| CAGR Returns | 83.29% | ||
| Absolute Returns | 135.89% | N.A. | |
| Investment Phase 2nd | Investment Amount | ₹235,887 | ₹100,000 |
| Start Date | 1 Sep, 2021 | 1 Sep, 2021 | |
| Current Value 29 Feb 2024 | ₹357,158 | ₹151,411 | |
| CAGR Returns | 18.08% | 18.08% | |
| Absolute Returns | 51.41% | 51.41% | |
| Investment Phase 1+2 | Combined CAGR % | 38.47% | 18.08% |
| Combined Absolute Returns % | 257.58% | 51.41% | |
If you will bifurcate the Investment A into Phase 1 (1st Apr 2020 – 31st Aug 2021) & Phase 2 (1st Sep 2021-29th Feb 2024), the things will be quite easy to understand.
Phase 1: Investment amount of Rs. 100000 grows to Rs. 235887 till 31st Aug 2021, with a CAGR of 83.29% in the 1st phase of investment. These are quite high returns in a short period of time, this sort of returns are not consistent & you may take it as a rare bounty. This happened as the whole money was invested at the very low of the stock market.
Phase 2: Investment A is kept invested on 1st Sep 2021, with a current value of Rs. 235887 & Investment B is started with an initial sum of Rs. 100000 on 1st Sep 2021.
You may see in table 2 above, both the investments during phase 2 deliver same CAGR of 18.08% as on 29th Feb 2024, if their investment date is same. But as an investor we see cumulative returns on the portfolio, but that can’t show the complete picture, if the amount is invested on different dates.
Phase 1+2: If you will see the overall portfolio as on 29th Feb 2024, you will see higher returns in Investment A. This is because Investment A was started when the markets were down due to covid-19 and the scenario was altogether different. The high returns generated during Phase 1 have a spill over effect on the overall journey of the Investment A.
Moreover, investor sometimes gets confused by comparing CAGR of a portfolio with absolute returns on another portfolio. This will always create self-doubt, as both the parameters are altogether different and cannot be compared.
Investors get swayed away by looking at the incomplete picture of portfolios and start taking decisions in haste. Frequently changing your financial planning & strategies may adversely impact your financial goal achievement in future. There are many factors that impact a portfolio, you must never judge a portfolio just by looking at the returns. It’s about your life & your financial goals, so you must not change your financial planning frequently, as it may lead you to middle of nowhere.
Portfolios which are delivering equal returns might have different risks associated with them. It might also be possible that one portfolio has provision of cash outflows for your upcoming goals, while other does not. Just imagine what might happen if you need money for an approaching financial goal and your portfolio doesn’t have any provision or liquidity for it. In fact, a high return yielding portfolio might be a loser in the long term due to higher risk in the portfolio. When the markets fall they will fall much more.
Investing in stock markets is not just comparing or chasing returns, it is more about managing risk and preparing for the worst. It is about not leaving accomplishment of your financial goals on chances & luck. If you have already created formal financial plan, avoid comparing your portfolio with others, as most of the time it will end up you taking decisions which will work against your financial plan.
Comparison creates confusion & we lose trust in our own strategy, which was based on certain parameters & reasons. If you ignore your financial goals & start copying others then you might end up inviting trouble for your financial future. Later, if you will not be able to achieve financial goals, you cannot give the excuse to your loved ones, “you did that because everyone else was doing it”.
Remember.. “You have to pay the price”
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