Starting to appreciate consistent performance

The following graph shows 3 year rolling returns of 3 different mutual fund schemes. (I have removed the fund names from the graph since the names of specific funds are not needed for this post.)

Rolling return graph taken from primeinvestor.in

The green and purple funds had sharp declines in March 2020 when the market had just reacted to the Covid-19 shock. The blue fund also fell, but not by as much. The reverse of this fall can be seen in March 2023. Any investor that invested in these funds in March 2020 got a significantly higher return than anyone invested right before or right after.

When I was new to evaluating investment assets, the peaks that the green and purple lines reach used to attract me. I liked such funds. “There is a chance of making an incredible return from these funds,” I’d tell myself.  Investing in funds like the blue line felt like leaving some returns on the table. I wanted to invest in assets that have the potential to maximise returns.

But high volatility can be hard to live with. When investing in a fund that provides fairly consistent returns, entry and exit times do not matter as much. A volatile fund can leave us less than satisfied depending on our entry/exit time.

Let’s say a fund’s NAV goes up from ₹100 to ₹130 within 4 months, and then falls to ₹121 in the next month. I’d find it hard to sell my holdings when the price is ₹121 despite knowing that anchoring to ₹130 is irrational. I’d delay exiting the fund as much as possible in the hope that the NAV may rise back up. Of course, the NAV can keep dropping below ₹121 as I wait. But that knowledge hasn’t been enough to gather the conviction necessary to sell at ₹121.

Over time, I have started appreciating consistent performance over potentially high—but uncertain—performance. I think the following reasons triggered a change of mind in me.

• Reading various articles on portfoliocharts.com and looking at the various charts that they plot to compare different portfolios.
• My experience selling the RSU shares that I receive from my employer. Working with volatile assets can be emotionally taxing.

There’s another angle to this, too. I used to think that investors avoided risk only when they were afraid of it. But now I know better. I avoid certain risky assets or risky portfolio mixes not because I fear the potential loss. Rather, I don’t particularly want the added return, so I am happy to keep both the extra risk and return outside my portfolio.