As Philosopher George Santayana famously said, 'Those who cannot remember the past are condemned to repeat it.' So, let us try to learn from the market lessons of the past decade.
The star performer of the past decade was, by far, the United States of America. The S&P 500 delivered growth of 250 percent translating into an impressive CAGR of 11.2 percent. The Nifty delivered 9 percent CAGR. Gold delivered 9 percent (4 percent appreciation + 5 percent Rupee depreciation).
As always, the past decade too witnessed high volatility across asset classes during different time periods. An important irrational trend was the bubble in mid and small-caps in 2017 and the inevitable crash that followed.
The market returns in India were lower than our historical averages. It is a fact that a 9 percent return is not good enough to compensate for the risk premium that investors are paying to invest in stocks. The relevant question is: what caused this relatively lower return and what do the markets have in store for the present decade?
An important point to note is that during the past decade the market exactly replicated earnings growth. Nifty delivered 9 percent earnings growth and the market delivered 9 percent returns. The returns were depressed during the last five years of the decade and this pulled down the decadal returns. Therefore, the key to superior earnings lies in higher GDP growth and corporate earnings growth.
It is also important to appreciate the fact that many stocks and mutual fund schemes delivered spectacular returns during the past decade, in spite of the average performance of the market as a whole.
Among Nifty stocks, Bajaj Finance, Eicher Motors, Britannia and Titan delivered 63 percent, 42 percent, 34 percent and 33 percent CAGR respectively; while Vedanta, NTPC, ONGC and Tata Steel delivered negative returns of 9 percent, 5 percent, 5 percent and 2 percent respectively.
Many mutual funds impressively outperformed their benchmarks, some of them delivered above 400 percent decadal return. This trend of outperformance and underperformance by some stocks and mutual funds will be repeated.
So, what are the important takeaways from the last decade?
- Asset allocation and rebalancing are important. When an asset class becomes overvalued, like mid and small-caps in 2017, move away from them.
- Diversification across asset classes is important. Remember, gold delivered the same returns as equity.
- Geographical diversification can be rewarding. Investment in the US equities through mutual funds gave impressive returns.
Learning from history will be a rewarding investment experience.
The author is Chief Investment Strategist at Geojit Financial ServicesDisclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.