Ever thought about where yourreturns come from? Is it the precise choice of fund or stock or product you in? Or is it your financial advisor’s plan that is the primary driver? Or maybe it is government policies that impact market returns and interest rates?
If you really think about this, none of the above are primary drivers of yourreturn. The foremost driver is your own return expectation. Ultimately that drives your behaviour towards and your choice of products. While one should not be too conservative, aggressive return expectations can backfire too. Here is why you must have measured expectations.
High return comes with high risk
In fixed return products like deposits and provident fund, you know what you will get as it is shown to you upfront, hence, no need for expectations. When it comes to market linked products like, you have to build in an expectation as future returns are not a given.
If your expectation is too high, you may end up including too many high-risk in order to achieve that. Or in other words you may be chasing return without giving adequate thought to risk. For example, what if your expectation is 15% from your ? Two things can happen, firstly, you may be less willing to add the cushion of fixed income products to balance risk in your .
Secondly, chasing return can lead you to compromise on quality of your investment. Bad quality investments more often than not have the potential for capital loss. You may also find yourself seeking assets and schemes which have empty promises of high returns, without questioning the modus operandi.
At 7%-8%debt allocation may not look favourable towards achieving the 15%. What you do choose, may be high return debt and that comes with its own risk. Within equity too, you may be tempted to pick the high return funds simply to achieve the 15% target.
Secondly, chasing return can lead you to compromise on quality of your. Bad quality more often than not have the potential for capital loss. You may also find yourself seeking assets and schemes which have empty promises of high returns, without questioning the modus operandi.
Whether it is price fall or poor quality, risk gets real when asset markets start to falter and if you don’t like to lose money; your high-riskmay turn into a bad experience. Hence, balanced and measured return expectations are important.
A better approach
A better way to look at this is to define what you are investing for. Maybe you are for basic retirement or maybe for higher education of your children. Whatever the reason, try to define it. Now think about how these costs are likely to change over time, in other words inflation. All costs, lifestyle, education or for utilities are likely to increase by the average inflation level. Hence, your needs to earn more than the rate of inflation. This is the expectation you should build into your – above inflation returns.
How much more? Again, this will depend on the blend of your desires – a basic retirement corpus may not need more than 2%-3% annually over inflation rate but if you have extensive post retirement travel plans, then you will have to build in expectations accordingly. Also, education inflation is typically higher than the average inflation rate.
Lastly, its not just the return expectation but how long you hold yourthat also matters. Building in an aggressive return expectation because you don’t have enough time on hand can backfire if markets are not favourable or if you have compromised on quality. Starting early helps you keep return expectations within an achievable range thanks to . Keep these points in mind while building up your expectations.