Every investor who deploys money in the market aims for wealth creation.
Typically, most people who are invested in the markets know that volatility is the name of the game. Investors have been told to aim for a decent compounded annual growth rate when looking at returns. For example, most investors when told to aim for 15 percent CAGR, tend to imagine a 15 per cent yearly increase in their portfolio every year. Actual returns, however, are almost never linear. Even though 15 per cent is the average, it does not mean that an investor will grow money at 15 percent every year. In fact, one of the most successful investors of all time, Howard Marks once quoted, “Never forget the 6 feet tall man who drowned crossing the river that was 5 feet deep on average.” He was clearly indicating that the depth of the river could range between 2 feet and 10 feet. Markets behave in a similar fashion. This is illustrated in the following table.
It is crucial to understand that markets do not move in straight lines—neither up, nor down. 2017 saw a large amount of liquidity that fuelled a one-way upward rally in the Indian mid-caps and small-caps. The opposite was true in 2018. Statistically, the chances of having a bad year after having a good year are high. This is known as mean reversion. So, the question is, does the sequence of returns matter if we end up with the same average CAGR? The answer to that question is a resounding 'Yes!'
Sensex Returns vs Reverse Returns
Esta historia es de la edición April 04, 2019 de Dalal Street Investment Journal.
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Esta historia es de la edición April 04, 2019 de Dalal Street Investment Journal.
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