Increasing forecasting accuracy

We have often seen various experts trying to predict investments which could generate maximum returns in the next one year. While a few experts would claim that the markets would go up, there would be another set of experts who would claim otherwise.

However, no matter how hard we try or what models we use, its mostly a wild guess. The markets will always have short term volatilities and there is hardly anyone who can consistently time the markets.

In the end, as a retail investor, you'll never have any concrete answer as to where to invest or which assets could generate the maximum returns in the next 1 year.

The problem is 1-year is too short a period to make any meaningful forecasts. These predictions are as good as a coin toss at the best. However, what happens if we could increase the time period to 3 years? Or 5 years? Can we start identifying patterns and increase the accuracy of our forecasts?

We at Finacular did a research on 10 different asset classes for 5-year rolling periods to identify the assets which have consistently generated the best possible returns and beaten all other asset classes. We considered 8 such periods starting 2009. The table below summarizes the results:

As expected, Equities have consistently performed the best among all other asset classes. For almost every 5-year time period, they have consistently generated double digit returns. Moreover these results are for the average large cap, mid cap and small cap indices. The best mutual funds and equities have generated far greater returns during all these periods.

The takeaway is simple. It is futile to try and predict which asset class can generate the maximum returns in next 1 year. There is hardly anyone who can consistently time the markets and win. The best approach towards investing and long term wealth creation is to have a longer time period and stay invested in high quality mutual funds and equities. When we can invest in FDs/ property/ PF/ Gold, for long periods of time without worrying about short term volatilities, why can't we do the same in equities?

Equities is the only asset class available to each and every retail investor which has the potential to generate massive wealth in the future. All you need is the right asset allocation, a bit of conviction and lots of patience to enjoy the benefits of compounding.


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