December 12, 2005

My hurdle rate for active investing

I use a hurdle rate which I need to cross if I need to justify the time and effort I spend on investing actively, rather than using a mechanical approach of rupee cost averaging (using an ETF or an index fund)

A rupee cost averaging approach of investing Rs 1000/- per month, every month for the last 10 years would have lead to an average return of around 15% per annum (As an added factor, I added a filter of stopping the plan when the market P/E exceeded 25. I added this filter to ensure that I would avoid putting money in the market when the market seemed overpriced by a decent margin).

This strategy would work even better with a mutual fund with a good long term record of beating the market by a resonable margin (resonable being +3% above market return over a period of 5 years or more).

So in effect if the portfolio of stocks picked by me, does not exceed this hurdle rate of 15% per annum (for a rolling cycle of 5 years and not for every year), then it would not justify the time and the effort.

Luckily till date I have exceeded this rate. But the results are not conclusive, because it could be due to dumb luck. I would consider the results to be conclusive only if I can achieve this kind of outperformance for a period of 10 years or more.

1 comment:

pey said...


Which phase of the bull market do you think we are in right now?

entered the 3rd?