What a topic! There is only one truthful answer to this: I DO NOT KNOW!

However, far more importantly, your investing or not investing should not depend on finding the answer to this.

I have seen IFA saying “markets will surely give 22% return per annum on a SIP basis” and garner a lot of SIP investments. One such person has a big SIP book and his clients are not getting returns in this range, but that is a different story. Most IFAs would give a number between 12% to 22% – and think it is their DUTY to ensure that the client gets AT LEAST this much by taking calls of sectors, market cap, fund manager, etc. You tell them this is futile, they ignore you of course.

Should we even attempt answering such worries about the future returns? Well, you meeting your goals (including comfortable retirement) are clearly a function of how much you invest in shares and how long you stay in those investments. That will also determine the returns you get – it tests your stomach churn!

How far is this expectation correct? will the markets give returns in excess of 20% (remember the fund return could be different, and it is after deducting fund management fees). In the US shares (stocks as they call it) has given 9.03% return since the past century!

Having data over a few decades does not help you come to a correct solution. There have been 2 blocks of 20 years where shares out performed bonds. However, on a SIP basis such a situation may not arise. You will get a decent return on your SIP in mutual funds, but you should have moderate expectations. If you do better than what you had projected, it cannot hurt you, right?

The best people to turn to are Robert Shiller and Jason Zewig. Jason says ” In the past, the stocks in Standard & Poor’s 500-stock index sold for an average price of 25 times their dividend income and 15 times their net profits — meaning that investors back then got to buy at bargain prices. But now, even after last year’s sell-off, the S&P 500 sells at 86 times dividend income and 26 times earnings — about as expensive as U.S. stocks have ever been. Common sense says that you’re not likely to get high future earnings out of anything if you pay too high a price for it.”

This is so true. If you pay too high a price, you cannot get a great return. Currently Indian shares are not really at some all time low. The pharma and IT stocks were beaten down recently, but they too have made some smart recovery. Sundaram Mutual fund is launching or has launched a contra close ended fund which might end up picking a lot of pharma and beaten down IT stocks. The worry is even the ‘beaten’ down Sun pharma is at a pe of 19 – and the growth may not match even this so called tepid PE. You can expect Reliance and SBI mutual funds too pushing hard to get SIPs going in their pharma funds, and all this might lead to some traction in the pharma sector. However the sector pe improving is a function of EARNINGS and EXPECTATIONS. If the pharma companies start doing well, they may give you some returns, but FMCG, banking, etc. all seem to be near their highs.

I will stick to my “I do not know” . However lets get the funda right.  Markets are clearly a slave of earnings and reputation of the management. Earnings depend on the growth of corporate profits and dividends (including the buyback, if any). All of this put together is “the investment return.” The long-term investment return of a share should reliably average between 5% and 6% annually before inflation. The “p/e” or the expectation is an untamed animal and it makes predicting earnings easier! So PE expansion in a market at a pe of 20 is perhaps a little tough to expect. So are we talking of a 6% + 5%(inflation) a 12% kind of a return over the next few years. This will of course be a 73% return in one year and a string of zeroes to compensate for this unimaginably high return.

Ha, Mr. Market, we will continue to guess what you will do. After all we are chess players we see the bishop, elephant, horse and the royalty move, and we know that you can do any of those moves!