Do not be overconfident about equity! It could hurt your financial goals

It is clear from how many readers, particularly young earners, respond to freefincal content these days that they are overconfident about their equity investments. Especially investments in small cap funds, mid cap funds, etc., that have soared in recent months. This could spell trouble for their goals and dreams.I hate to break it to you, but there is no proof that long-term equity investing will always give you “good returns”. All those arguments about the economy growing and the equity market reflecting those returns are mere opinions peddled by product manufacturers and their associates, fanned by influencers and heightened to legend by naive and lazy investors.Yes, equity offers a more than reasonable chance of beating inflation (not matching your expected return), but that does not mean it always will. Here is our research:Before continuing, I would like to clarify that we are not against equity investing (close to 65% of my family’s net worth is in equity, and more than 85% is market-linked, thanks to mandatory NPS). We are only trying to caution against overconfidence in equity.So many people today assume their excellent returns will never drop. If there is something that we can be sure of about the equity market, it is good times will end – My retirement equity MF portfolio return is 2.75% after 12 years!Sharp drops are usually preceded or succeeded by sharp highs due to an idea called volatility bunching. Read more: Timing the market will work but not how we imagined! The bigger problem is years of sideways markets.This can happen due to economic slowdown, uncertain political climates, war, etc. We had such a “lost decade” in the nineties. In that decade, we did not have a stable government besides our economic difficulties (India was recovering from the brink of bankruptcy).Can you be sure you will never encounter political uncertainty and poor economic growth in your investment journey?There may be broad correspondence between economic growth and equity markets, but that does not mean it would be your specific experience. Besides, as the economy develops, equity markets become more stable, less volatile, and less rewarding. We already have enough evidence: Sensex at 50,000: lessons from the 42-year journey.And what makes it worse is that many of the long-term returns of the past stories are based on just a few years! See: 44-year Sensex return is 17%, but half came from just four years!As for the great small cap funds, there is no evidence investing in these will always get you spectacular returns. Is there any proof small cap mutual funds would outperform in the long term?We do not have enough history of small cap funds, and whatever little we have, before 2018, when the SEBI MF categorization rules kicked in, many of these small cap funds held significant chunks of mid cap stocks. So, the long term returns of these funds are partly due to mid cap stocks —more about this in a detailed article. Also, see Nifty vs. Nifty Next 50 vs. Nifty Midcap 150 vs. Nifty Smallcap 250.Being overconfident about the equity markets is probably among the worst investing mistakes we can commit. Equity is like fire. Fire is indispensable to our lives, but getting comfy and fooling around with it would burn you.If there is one statement that we should take seriously about mutual funds, it is their disclaimer:“A mutual fund scheme is NOT a DEPOSIT product and is not an obligation of, or guaranteed, or insured by the mutual fund or its AMC. Due to the nature of the underlying investments, the returns or the potential returns of a mutual fund product cannot be guaranteed. Historical performance, when presented, is purely for reference purposes and is not a guarantee of future results. Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully”. – Source: AMFIWhile our long term goals require a good chunk of equity, our planning also needs a good dose of safety – reasonable inflation estimates, low return expectations from equity, asset allocation, diversification and an efficient de-risking strategy to achieve our goals regardless of future market conditions. 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He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), 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. Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! 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We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!Feedback from a young reader after reading Chinchu gets a Superpower!Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun. Buy the book: Chinchu gets a superpower for your child! 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