2020: Not just about Simple Annual Returns

If you look at the annual returns of Nifty, then it will tell you that in the year 2020, Nifty50 gave returns of 14.9%. But just looking at the figure of 14.9% doesn’t tell everything about what happened during the year.

It was a crazy year! Not just financially, but almost in every possible way. But let’s just focus on the equity markets here.

Have a look at the 2020 Nifty50 returns chart (Year-to-date) below:

Nifty annual 2020 returns

At one point during the year (in crazy month of March 2020), markets were down by almost 38% for the year. And it wasn’t that this was a gradual grind down. It was a sudden fall off the cliff in the month of March.

From then on, and surprisingly to many, it has been an almost relentless rise up to new highs. In fact, from the March lows of 7600s for Nifty, we ended the year at close to 14,000. That is an up move of almost 84% from the lows. That too in a matter of 8-9 months!

But why am I telling you this?

Because I want to highlight that the figures like annual returns do not tell everything. They do not tell anything about the emotional upheavals one goes through when markets fall during the year (like down almost 35-40% in a month in 2020) or when they rise quickly from the bottom (Like 80-90% in a matter of months).

And this is something that you as an investor needs to understand.

A few years later, when you look at historical returns, then you will simply say that “Yeah, 2020 was a decent year for markets. It gave 14-15% returns for the year.” But reality is that year was a rollercoaster ride for everyone in the market (just spend some time looking at the graph again to get a sense of how the year panned out).

The annual return figure almost always hides what happened during the year and how people felt.

Similar is the case of looking at average returns. Averages hide a lot of things. Just like how a 6 feet tall man can drown in a river of 5 feet average depth! In other words, the concept of Compound Annual Growth Rate or CAGR is a beautiful one.

But CAGR hides the emotional upheavals an investor goes through.

Average vs Actual returns

Something to ponder over as the crazy year of 2020 has now ended.

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