Historic returns vs. Future returns relationship - a thumbrule for asset allocation and rebalancing

 This was publised by Kumar Saurabh (twitter @suru27 ) of Scientific investing

You can find the original video here

This chart provides a point of view on when to invest aggressively and when to book profits in equity. Eg. take the chart on 1 Jun2 2002, Yellow line is the previous 5 year NIFTY CAGR, when we say the last 5 year (1997-2002) return as on 1 June 2022 is (-) 2% then the orange line depicts the return given by NIFTY in next 5 years (2002-2007) which is higher at 32%, this says when nifty gave negative returns for past 5 years, the next 5 years was very rewarding with +32% CAGR return. 

Inversely, when in Sept 2007 the NIFTY had returned past 5 year (2002 to 2007) CAGR of + 41% the next 5 year returns was close to 0.  

The lines at extremes mean when past 5 years were good, the next 5 years were not very good and vice versa. 

Also another data emerging is that in the period post 2010 NIFTY has never given a 20% CAGR over any 5 year period. Be conservative and expect < 15% CAGR (orange line data from 2017 will be available post July 2022 and hence depicted flat) 

This also amplifies why invest thru SIP. When historic returns are very high we could avoid investing in  lumpsum , rather spread them to times when historic returns are poor, this increases the probality of good future retruns as seen the chart above.

The lines at extremes mean when past 5 years were good, the next 5 years were not very good and vice versa.

Similar trend explained with 2 year interval, it proves again that when the last few years return are very good, lower the expectation for next 2 years. When the last 2 years have been very painful and you keep doing SIP from that painful period, you can expect good returns later

The Story of a Crash

this article originally appeared here

This chart denotes the number of days it took for the market to recover after a 15% crash 

(see column - 'days to recover')

Chart prepared by Capitalminds

How to read?

If you invested after a 15% market fall, it took anywhere between 10 days to 1299 days (3 years+) to recover your investment and make a nominal profit.

What this means?

Invest only your Risk Capital, only that you can put away for a period of 5 years

And in the end, this is a probabilitic activity, there is no  100% certianity

Keep Emergency funds for Emergency, they are not for investing in risk assets like equity