Q. What returns can I expect from this investment?

by Manshu on February 24, 2011

in Opinion

Ans. Your investment will plummet in the next few years, and it will take about 25 to 30 years to recover it back.

That’s not the answer you wanted to hear, but that would’ve been the correct answer for anyone asking about gold investment in the late 1970s.

Here is a chart that shows how gold prices moved from the 70s till date.

Gold Price Since the 70s

Gold Price Since the 70s

I bring this up because there are a large number of comments that ask about the expected returns on gold, or some other commodity or mutual fund without inquiring about risk.

As I’ve said earlier, there is absolutely no point in talking about returns, if you’re not talking about risk. While it might be true that gold has historically returned more than inflation, or that it has done extremely well in the past decade – that doesn’t mean it will continue like that forever.

Let’s see if you can guess what I’m talking about here.

If you invested in me today you will lose 80% of your money in the next two decades. Don’t worry – it will be painful at first but then you will get used to it.

This is not a penny stock or some shady investment – I’m talking about Japan’s leading equity index the Nikkei 225 which reached its peak in 1989, and was at about 20% of its value two decades later.

I have a strange feeling that a lot of Japanese folks were talking about expected returns in the late 80s, but there weren’t many who were talking about risk.

There is risk in everything – inflation eats into cash, countries can go bust and default on their debt, and of course banks can go under as well. You can’t just go back to the barter system because of that; my point is that you should understand that there is this risk element present in these avenues, and try to understand that.

A lot of people do ask these type of questions, and that’s great, but for those of you looking for an expected return number only – you’re looking at just half the equation.

{ 7 comments… read them below or add one }

Hemant Beniwal February 24, 2011 at 8:01 pm

Hi Manshu,

I really liked this line “Don’t worry – it will be painful at first but then you will get used to it.” Investors across the world are suffering from short term memory loss.

Nikkei is a great case study if people want to learn from it – but what we learn from history is that we don’t learn.

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Manshu February 25, 2011 at 4:42 pm

Yeah I guess the short term memory phenomenon is true with us in all aspects of life. People forget about scams too, corruption, bad monsoons, everything. Just part of human nature I guess.

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Salar February 24, 2011 at 9:23 pm

Hi Manshu,

Nice read!. But alas, most of us have investment myopia and look only for returns undermining the huge risk we take.

Salar

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Manshu February 25, 2011 at 4:43 pm

Investment myopia – that has a nice ring to it 🙂

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Ramanji February 25, 2011 at 12:17 am

The investment funda has always been “Twice Bitten Never Shy”

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Manshu February 25, 2011 at 4:44 pm

haha – so true – so many people who lost money in dot com boom, then in the last crash, and now are all gung ho about the market again.

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BUY eGOLD & eSILVER February 27, 2011 at 9:53 am

The best straight forward article we have read so far. People do not want to read or hear what they do not want to. We always want to read and hear what we want to hear. It makes us happy. But blunt article like this are true and honest reading.

The other day, was thinking that if astrologers can predict others future and give advise to solve others’ problem, why do they themselves do not improve their lot. In fact they also cannot predict anything about themselves. If they are giving advise to 100 people we are sure that only 20-25% must be coming true by fluke and are happy.

So NO ONE CAN PREDICT the FUTURE course. We have to live based on today and take informed decisions and move on depending on changing trends.

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