The most dangerous assumptions in investing are the ones we never question
For many investors, debt is viewed as a necessary allocation rather than a meaningful long-term asset class
Investors tend to focus on the possibility of earning an extra percentage point or two of return
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Investors often believe they make decisions based on facts, numbers and rational analysis. The reality is more complicated.
Most investment decisions are shaped by narratives—stories that get repeated so often that they gradually become accepted wisdom. Over time, these narratives become embedded in financial plans, influence investment choices and shape expectations about the future.
The problem is not that these narratives are entirely wrong. The problem is that investors often stop questioning them.
Consider some of the most widely accepted beliefs in investing today. Equities create wealth while debt merely preserves capital. Midcaps and smallcaps significantly outperform largecaps over the long term. Equity markets deliver 12-15% annual returns if one stays invested long enough.
At first glance, each of these statements appears reasonable. Some may even contain a degree of truth. Yet when these beliefs are examined more closely, a more nuanced picture emerges.
A senior professional recently told me that he was assuming his investments would generate 12-15% annual returns over the next two decades. When asked why, his answer was straightforward: those were the returns he had observed and experienced over the past few years.
His response highlights one of the most common behavioural tendencies among investors—the tendency to extrapolate recent experience into the future.
When property prices rise sharply, people begin to assume they will continue rising. When gold performs well, confidence in gold strengthens. When equities generate exceptional returns, investors gradually begin to view those returns as normal rather than exceptional.
History suggests caution.
Over the last 26 years, the Sensex has delivered approximately 11% annualised returns. However, a significant portion of that performance was generated during two extraordinary periods—the rally between 2003 and 2007 and the post-pandemic surge between 2020 and 2024. These phases were remarkable, but they were not representative of every market environment. Yet they continue to influence the return expectations that many investors use while planning for retirement and other long-term goals.
A seemingly small difference in return assumptions can have a significant impact on financial outcomes. An investor planning for a 15% return may need a very different savings rate and retirement corpus than someone planning for a 9-10% return. When expectations become detached from reality, financial plans can become fragile.
The same pattern is visible in the way investors think about midcaps and smallcaps.
The prevailing narrative is that these categories substantially outperform largecaps over the long term. An analysis of over two decades of rolling returns highlight that, while there is evidence of outperformance over shorter periods, the magnitude of that advantage often narrows as the investment horizon extends. More importantly, discussions about return differentials frequently overlook the additional volatility, higher costs, taxation due to churn and behavioural challenges that accompany them.
Investors tend to focus on the possibility of earning an extra percentage point or two of return. They spend far less time considering whether the additional risk required to earn that return is proportionate to the reward.
This tendency to focus on outcomes rather than process may explain why another asset class—debt—often receives less attention than it deserves.
For many investors, debt is viewed as a necessary allocation rather than a meaningful long-term asset class. It is frequently described as safe, conservative and useful primarily for stability.
Yet the long-term data tells a more interesting story.
Over the past quarter century, debt investments have delivered returns of ~9%, that are not dramatically different from those generated by equities. The difference, however, lies in how those returns were achieved. Equity returns were heavily influenced by a few extraordinary phases, while debt continued to compound steadily across a variety of market and economic conditions.
This does not diminish the importance of equity. Equity remains one of the most effective tools for long-term wealth creation. Nor does it imply that debt is superior. Rather, it challenges the simplistic labels that investors often attach to asset classes.
Perhaps the distinction is not wealth creation versus wealth preservation.
Perhaps it is higher potential returns with greater uncertainty versus more modest returns with greater consistency.
Viewed individually, these observations may appear unrelated. In reality, they stem from the same behavioural tendency: the human desire to simplify complex realities into easy narratives.
The challenge for investors is not to reject these narratives entirely. It is to question them often enough to ensure that their financial plans are built on evidence rather than assumptions.
Because successful investing is not simply about selecting the right mutual fund or identifying the next outperforming asset class. It is about building a financial plan that remains robust even when markets behave differently from what we expect.
And that begins with a simple habit that many investors overlook:
Questioning the assumptions that quietly sit inside their spreadsheets, retirement calculators and financial plans. After all, the greatest risk to a financial plan is often not market volatility. It is an assumption that was never challenged.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.