If the frontline index Nifty 50 has a big year, recording a sharp upmove or downmove, the next year usually records moves in the opposite direction, according to a recent study by Capitalmind Financial Services. Investing every year from 1999 to 2015, annualised returns converge into a narrower range after the 10-year+ mark, irrespective of the wild variation in the early years.
Simply put, "Over time, supernormal returns of 20-30 percent inevitably moderate downwards. The lesson is simple: if one had mega years early on, moderating subsequent expectations, at least for the next 2-3 years, will help avoid unrealistic net worth projections and subsequent disappointment," said the study.
For example, an investment made during the start of the year 2009 would have incurred an upside of 73 percent in the first year. However, the 10-year annualised return of the investment value gets narrowed to 15 percent.
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However, the reverse is also applicable. The frustration of barely-there returns in the initial years tends to be followed by productive years that normalise a lot of the disparity between lucky and unlucky investors.
"If one had invested in the year 2000, first year return would have met with a decline of 18 percent but an annualised return in the 10th year of the investment was recorded at 14 percent," noted Capitalmind.
Therefore, investors should embrace a long-term horizon to smooth out volatility and
capture the market’s innate tendency to rise, while using SIPs or periodic investments to mitigate the risk of poor entry timing.
Most importantly, market participants should invested through downturns and view market pullbacks as opportunities rather than threats.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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