The Expectation Gap: How Behavioral Finance can help Investors achieve their goals.

Managing expectations of equity investors has been a challenge for many portfolio managers and advisors in recent times with investment portfolios of investors showing higher double digit returns in CAGR/ IRR terms.

The below writeup is to relate this scenario to the bumpy ride of the investor of the last decade from 2011-2020. For this, I have taken examples from the popular Netflix Spanish web series: Money Heist

Money Heist is about a group of robbers with different backgrounds recruited by The Professor, a brilliant and unassuming man, to help him carry out a heist in the Royal Mint of Spain.

But more than the elaborate plot to rob banks, outsmart the police, and lay out escape routes, Money Heist characters also have a lot to teach us about money and patience in general. For this article I have chosen Tokyo and Professor, two of the many famous characters of the series for their below mentioned matching personalities to my story.

As seen by all of us, Tokyo is reckless and impulsive, she usually acts before she thinks, which sometimes results in things she regrets. She prefers to take an adaptive approach and figure things out as she goes along. However, her rashness and impulsivity can also be her downfall. This can lead to some trouble for both her and the robbers, but luckily she had The Professor to rein her in when needed.?As for The Professor, he was the one who planned every step of the heist in excruciating detail, down to the very last second. His quick-thinking and deep analytical skills allowed him to remain one step ahead of his enemies the whole way through. And when things weren’t going as planned, he was able to adapt quickly and come up with a new plan.

Lets take their characters as an example and figure out if Tokyo was an equity investor and the Professor her Investment Advisor, how would their journey over the last decade have been?

The last decade from 2011 to 2020 was not a smooth journey for investors. The markets had to experience uncertainty with many events and reforms like:

• Corruption scandals at the beginning of the decade
• Demonetization in 2016
• GST in 2017
• NBFC crisis In 2018
• Covid-19 : Final nail in the coffin.

Tokyo wakes up on 1st January 2011 with a resolution to start savings and starts a SIP of Rs.30000/- per month. Luckily, she has a trusted financial advisor - The Professor who allocates her money equally across three schemes in largecap, flexicap and midcap category.

Now lets see, how managing the behavior of the investor (Tokyo) was the major task for the Advisor (Professor)

Report card - The first three years from 2011 to 2013: Invested amount was Rs.10.08 lakhs and value of investment was Rs.12.4 lakhs. An IRR of 9.68%

Tokyo’s reaction “I have been doing SIPs for three years. Despite taking risk, my returns are similar to bank fixed deposits which are yielding 9.25%. What’s the use of doing these SIPs and taking equity risk?

Professor “Listen Tokyo carefully. Equity investments are long term beneficial by nature. They outperform other asset classes in the long term. SIPs have brought discipline in your savings and with rupee cost averaging and compounding, you will emerge a winner. Have faith and continue.”

Tokyo takes professors advice and continues her SIPs

Report Card – From 2011 to 2014: Invested amount 14.4 lakhs and value of investment 25.58 lakhs. An IRR of 23.87%

Tokyo’s excited reaction “This was unbelievable. I have made a fortune. Lets get out of here, remove our money, book our profits and come back when the markets correct.”

Professor’s response (relatable to the current market scenario) “Yes Tokyo, this was a good year and years like these are small battles won. But we haven’t met our financial goals and also to book profits, how will we know whether markets will go up and correct later or will they correct now itself. Even if we get one part right of the exit, how will we catch the bottom to re-enter. Let’s stick with our financial plan and the right mix of products for asset allocation purpose. This is a marathon, not a sprint.” ?

Tokyo sighs but takes the professors advice and again continues her journey of SIPs

Report Card – From 2011 to 2016. Invested amount 21.6 lakhs and value of investment 31.49 lakhs. An IRR of 12.75%

Tokyo’s reaction “Nothing seems to move in the market. I think markets are off its steam. I added approx. 7 lakhs in the last two years but the overall portfolio moved just about 2 lakhs.

Professor’s response “That’s right but what were your other options? We have done better than other traditional assets and beaten inflation by a wide margin. Our objectives are being met. Keep your expectations realistic for long term. The returns of 12% to 15% are realistic. So be focused and move ahead.”

Tokyo agrees with Professors advice and continues as per the plan set in 2011.

Report Card - From 2011 to 2017. Invested amount 25.2 lakhs and value of investment 46.22 lakhs. An IRR of 17.38%

Tokyo’s reaction “Long term makes sense professor. My money has grown at an IRR of 17% since 2011.”

Professor “Yes Tokyo but understand one thing and remember what I said. The returns fluctuate every year basis movements in markets. Having a realistic expectation of 12% to 15% is better over 10-15 years.

This time, Tokyo Smiles ??

Report Card - From 2011 to 2019. Invested amount 32.4 lakhs and value of investment 55.61 lakhs. An IRR of 11.82%

Tokyo shocked “Nine years professor! Is it not long term? My money growth has come down to 11% You had said 12% to 15% over long term is what can be a realistic expectation for the investor.

Professor “Yes Tokyo, but there are years of positive 20% and there are years of negative 20%. So, one averages over a period of time. Your portfolio was higher than average last few years and now its below average. Have patience

Tokyo keeps her fingers crossed

Report Card - From 2011 to 2020. Invested amount 36 lakhs and value of investment 72.99 lakhs. An IRR of 13.73%

Tokyo’s reaction: Yō Professor !! We Won

Take a guess what the Professor Says. ??

Note: The views and numbers expressed in this article are solely the calculations done by me using category returns and do not necessarily reflect the official position or opinion of my employer