Often the beginning of the year is the time when investors look to pick the winners for the next year. That approach, obviously is fraught with danger – considering a year is too short a time period in the investing world. So, if you are looking to find a sure-shot winning investment idea for 2021, you can stop reading further.
Having said that, let me share one of the better ways to choose your investments. It might not play out within a year, but like most new year resolutions, if you stick to it long enough, it would pay off.
We all want our picks to be the winners. We also want to play it safe. So, what do we do? We end up trying to find the past winners and want to hug them. Make no mistake, I am not trying to belittle consistency. But we all know that it’s almost impossible to end up being a top performing investment instrument, year after year. Even Tendulkar didn’t figure as the top run getter in test cricket every year. In fact, in the list of batsmen who have scored the most test runs in a calendar year, he only appears twice in the Top 50. I digress, but you get the drift.
Why ‘recent’ past performance might not be the best way to make investment decisions
|Asset Class||Past||Absolute Return (in %)||Future||Absolute Return(in %)|
|Gold||2013-2015( 3 years)||-23 %||2016-2020(5 years)||95 %|
|BSE Small Cap||2011-2013( 3 years)||-21.6 %||2014-2017(4 years)||180 %|
|BSE Small Cap||2014-2017(4 years)||180 %||2018-2019(2 years)||-30.4 %|
There are many more such examples, but the above are enough to drive home the message.Why is hindsight investing popular?
In Hindi there’s a proverb ‘Jo Rogi ko Bhaya, woh vaidha farmaya’ which translates to- the doctor recommends whatever medicine the patient prefers. It’s pretty similar in the investing world. Most of the funds being recommended to the investors are the ones which have done well in the past. Reason – its far easier to convince about something that has done well in the recent past. As an investor, one of the thumb rules to select an investment idea is to evaluate how easily you are getting convinced with it. More often than not, the longer it takes, the better it is.
You don’t earn meaningful returns by doing what everybody else is doing. Look at the mutual fund NFOs, most of the best performing ones are thematic funds.
So, we come back to what are the areas one should invest in going ahead. No easy answers there, but look around what’s not done so well in the recent past and I am sure you will find some answers. Credit Risk Funds/ India vs International Equities/ Value vs Growth could be some of your areas to compare and decide. All of this should align with your risk profile and asset allocation. Don’t get swayed into any particular asset allocation and don’t deviate from the boring processes of managing your money. Hopefully the year will set you into the right direction for a journey, which will obviously take longer than a year.
(The author is the Founder of BuckSpeak Pvt Ltd, an investment advisory firm, based in Hyderabad.)