It’s easy to make assumptions. All you need is incomplete information and unwillingness to ask questions to complete the information.
Part of the beauty of the human brain is its ability to go on auto-pilot. Over time, it learns a large number of common tasks like how to back up a car out of the driveway, the necessary steps to get ready for work, and countless others. By going on auto-pilot, the brain saves energy. While this can be very handy in our daily lives, it can be costly when our brains operate on auto-pilot in making investment assumptions.
But the good news is, a few philosophical tweaks to your approach may be all you need to turn your results around. Here are the biggest stumbling blocks many investors must work past before they start making the sort of money they’d like to.
Assumption #1
We assume that past performance of a mutual fund can be extrapolated into the future. However, no matter how often we parrot “past performance is not indicative of future returns.”
The IT index consistently underperformed for 5 years (from 2014 through 2019), making it part of the lower quartile compared to the other indices. If we take a look at the overall CAGR for the entire period we get to know that IT index has only given 9% p.a. Who could have predicted that the next 2 years will a dream rally for IT companies?
Assumption #2
We assume a “Safe Stock” can be ignored. Take Exide Industries. In 2010 the company’s outlook was looking great with respect to future growth and its margins in the business, but the company didn’t do well in this decade and compounded at only 1% CAGR from 2010 to 2021.The price is trading in the same range after 10 years as well.
A stock can languish for years on end. HUL barely moved up between 2003-2008. Nestle was more or less static from 1999 to 2004. Pharma stocks largely underperformed during 2015-2019 period. ITC has not climbed from 2016. Would you just make assumptions and react accordingly, or would you dig deeper?
HINDUSTAN UNILEVER
- The price of HUL remained consistent and was trading in a range of 200 to 300 for first 10 years (2000 to 2010)
- The CAGR for period 2000 to 2010 was just 4%, however, from 2011 the company started to pick up and from then has rarely seen a negative year, compounding at the rate of 22% for next 10 Years.
Assumption #3
We assume that “Market is going to fall.” So we stay in cash. But the correction is nowhere in sight, and meanwhile our money lies idle in savings account.
Markets can continue to be at all-times high for an irrational period of time and no one can predict the next crash. Sitting idle will be just an opportunity loss, so the best thing a person can do is to invest systematically in SIP’s which will help to distribute your risk and return over a period of time.
Assumption #4
We assume that “Bull run will last long time.” So we tank up on stocks and forget how crucial Asset Allocation is.
Our behaviour is a cocktail of assumptions, emotional biases and perceived truths. We make decisions based on what we “think we know”. The more you challenge your underlying assumptions, the better facts will open to you. Having a financial coach can serve as a capable and trusted guide to help you navigate through your assumptions and make smarter decisions.
Assumption: The market is going to fall
Questions: Do you know when? Are you the best predictor of the next bull or bear markets? Did you predict such a spectacular recovery after the vicious drop of March 2020?
Instead of being reactive, control the narrative: Ok, so the market will fall. Market is uncertain. So why bother myself?
When emotions rules, facts take a backseat. Control your emotions by examining the facts.
Assumption: The fund has topped the performance and will make investor’s rich.
Question: Why is it a chart topper? How has it performed over the years? Is it a good fit in your portfolio or will you be duplicating this type of fund?
Instead of being reactive, control the narrative: How are the funds in my portfolio doing? Are they taking me to my goal of long term wealth creation? What if this fund does not give expected returns?
Your assumptions make or break your financial forecast. Here’s why iVentures Capital offers to structure your deep-seated emotions and helps you make informed decisions in your financial journey. Don’t let your emotions run the show! Stay the course; Your Portfolio will Thank you!
iVentures is a financial boutique firm that offers bespoke solutions in Asset Management, Credit Solutions, fixed income and Wealth Management.
Established in 2005, iVentures Capital has helped 2000+ families build their legacy.
And managing over 500cr of Investments for its clients.
Reach out to us at wealth@iventures.in to help us help you in reviewing your portfolio complimentary.
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