In this article, we’ll explore where risk premiums come from in debt and equity. This is important because risk premiums are not fixed and change with time. So, if you base your return expectations wrong, you may wind up with a different corpus that you originally planned to.
I like to approach my investing with the same mindset that I approach watching India play cricket abroad. The keyword there is ‘abroad’.
See, when India plays abroad (and I mean the SENA countries – South Africa, England, New Zealand and Australia), my expectations are low. When they do better, I am elated, and when they lose, I don’t get too depressed.
I think watching our investment portfolio should be the same. Having realistic expectation means, a boom market (like now) makes us real happy, but a downturn does not faze us much. There is, let’s just say, downside containment of our disappointments 🙂
On the other hand, if we look at our portfolio like watching India play at home (like right now), we expect too much, every defeat is a an unexpected disaster, and a win feels like just ok.
Not good feelings; And makes us act rashly with our portfolio (like ‘resting’ Rohit Sharma :-/ )
How do we form the right expectations, you ask? Glad you did – please read this article from our archives – it’ll set you right!