In response to Portfolio Audit 2023: The annual review of my goal-based investments, a reader asks, “Why are you recommending index funds when your portfolio has beat the market?”
If you take a casual look at the growth of my retirement portfolio*, it may s`eem like my portfolio has comfortably beat the market. * compared with identical transactions in Nifty 50 TRI from June 2008 to Jan 2024. This was plotted using the freefincal mutual fund and stock portfolio tracker.
Yes, at the time of writing, that is certainly the case. But a closer look reveals a different picture. Let us take this time series (date vs value array) and compute rolling returns over five-year periods. This tool is part of the freefincal investor circle.
We shall break down the investment journey into two parts for better viewing. From June 2013 (the first five-year period since I started investing in June 2008) to June 2018. Then, from June 2018 to Jan 2024.
Notice that the portfolio has underperformed the “market” from time to time. If we plot the return difference between the retirement portfolio and Nifty 50, we can see the underperformance (value < 0) is about half the time and often for extended time periods.
So the outperformance you see today is temporary and purely accidental. Therefore I urge young earners to not make the mistakes I did and chase after active funds. Keep it simple and just buy a Nifty/Sensex Index fund. If you want a little more adventure buy a Nifty 100 index fund. If you want a bit more adventure buy a Nifty Next 50 index fund (small exposure). That is it. This is all the drama that you need in the stock market.
It makes no sense for me to invest in an index (although technical I have a smart beta index fund – UTI Low Volatility and have started My 13-year-old’s investing journey with an index fund) fund like the Nifty/Sensex now. My portfolio is big. So switching will incur a lot of tax. Starting fresh investments will only lead to portfolio clutter. It will take more than a decade for such fresh investments to weigh higher than my current active funds (in which time they may get bigger).
This is all the more reason for young earners to avoid such predicaments and buy index funds. Dopes like me have made all the mistakes for others to avoid.
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Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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