Risks and returns are always meant to be viewed holistically. But, how many of us do that? An interesting incident only reminded us how little people respect risks.
An investor had been invested in equities for the three-year period between 2014 and 2017. At the beginning of 2018, just as oil prices began to rise and Indian macros started to appear shaky, the prudent move of booking profits in over-valued parts of his portfolio was advised. He went ahead and moved monies to liquid instruments. Subsequently, his returns dipped to the more moderate levels that liquid funds usually generate. But, the investor was still obsessed with Nifty returns. He was dissatisfied that he wasn’t making Nifty returns.
The value of lowering risks and returns was not adequately understood. Making returns seemed to matter far more than managing risks. Where one invests matters. Changing the asset allocation of an investor to recalibrate his risks will always come at a cost. Similarly, even when our approach chooses relatively cheaper parts of the market and advises investors to put money into them, they still run the risk of becoming cheaper.
Returns will be lumpy and investors should learn to always shift their focus on risks while evaluating advice. As long as the advice is sensible and moderated in its risk approach, we should not worry about the returns. After all, markets habitually reward investors who take risks in a disciplined, organized fashion. The key thing to be done now is to follow a disciplined and organized approach to risk taking and deployment of savings.
Returns will follow those who stay mostly sensible when taking risks.