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So many people cringe at the possibility of low returns. Especially at times when the stock markets are booming. Without blinking we say that we are fine with the possibility of negative returns, but are not ok with low returns….Duh!!
It’s simple first grader math actually. If you make a ‘low’ 4% return for two years, your hundred Rupees will become 108 (lets leave the trivialities of compounding out). On the other hand, if I make a negative 20% in the first year, I am down to 80. Then even if I make a superb 25% next year, I am only back to 100!! While you, after two low return years, are at 108!! To put it in perspective, if your portfolio is 2 crores, you would be better off by 16 lakhs; if your portfolio is 200 crores, you would be better off by 16 crores. It makes sense at any portfolio size.
So, should we aim for a low return strategy? Definitely not.
Then obviously we must aim for a high return strategy, mustn’t we? Even more definitely not.
Not returns, we need to focus on risk. On managing risk. We do that because returns are the outcome of taking risk. Control risk and we will have a much better handle on returns. Control returns? Not only we can’t, but we will also be all over the place in terms of risk. We need to manage our risk well because that defines whether we will have the money when we need it,… or not.
There is adrenaline in a single minded, ruthless pursuit of returns. That is fine if our money is an end in itself for us. But if money is a means to something greater in life, then it simply makes more sense to ensure cashflow for those events. Aka take necessary risks. No less, no more.
- Devang Shah
February 1, 2022
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