A reader wants to know if a “10% annual rate” can be expected with an investment horizon of “minimum 5 years”. Again, regular freefincal readers might dismiss this as a beginner’s mistake, but it’s a common mistake and worth paying attention to.
The first point to assess is that there is no “annual” return unless you invest in a guaranteed return bond. In products linked to the capital markets, such as mutual funds, the (ultimate) return is completely unknown and is calculated in hindsight. That’s the end of the investment period. So a good rule of thumb is to expect the lowest possible value.
Many investors try to make up for their inability to invest more by taking more risk assuming higher rewards. This is wrong. High risk just means high risk. That means a wider range of possible returns, which can end up anywhere from large positives to large negatives.
So how do we deal with this uncertainty?
- time. The longer the investment horizon, the more likely you are to manage your portfolio according to your needs and mitigate this uncertainty. Some argue that the longer you invest, the more likely you are to get a “good return.” This is wrong.Uncertainty associated with the stock market Never die! See also: Stock markets always go up in the long run, but returns fluctuate up and down. If you don’t manage risk systematically, you leave the fate of your investment to chance.
- Asset allocation: The right mix of volatility (stocks) and stability (bonds) is essential. This is the easiest way to reduce return uncertainty. However, most investors get this wrong. They use too much capital in the short term or use too little capital in the long term.
Asset allocation is primarily determined by the investment horizon. So for this to be successful, you need to be clear when you will need the money. Many investors say they want to invest for five years initially, but when asked when they will need the money, they say they can afford to invest for longer.
For this reason, it is important to distinguish between short-term and long-term goals. Even though they say you can invest for at least 5 years, we can only offer her 5 year recommendation.
Five years is still a very short period of time. During this period, it is difficult to minimize return uncertainty. So if your goal is important (need), I recommend avoiding all stocks. For flexible goals (wants), you can consider a conservative hybrid fund like the Parag Parikh Conservative Hybrid Fund.
But don’t expect 10% back. Don’t expect a refund. It’s quite possible to get a 7-8% return just by investing as much as you can each month (assuming this is your only money and risk is not managed).
Finally, avoid the temptation of high-interest fixed deposits and bonds. They are subject to credit risk. Recovery from failure is nearly impossible.
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Dr. M. Pattabiraman(PhD) is the founder, editor-in-chief and lead author of freefincal. He is an Associate Professor at the Indian Institute of Technology, Madras. He has over nine years of experience in publishing news analysis, research and financial product development.connect with him via twitter again LinkedIn, again Youtube. Pattabiraman has co-authored three printed books: (1) Goal-Driven Investing Can Get You Rich For DIY investors (CNBC TV18). (2) game changer for young people breadwinner. (3) Chinchu gets super powers! for children.he also wrote 7 others free e-book On various money management topics. He is a patron and co-founder of “.toll only india,is an organization that promotes impartial, fee-free investment advice.
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