Investing in equity funds has been a painful experience for many participants in the financial market. As we have seen over the last few years, the damage done to investors is deep and multifaceted, and it may take a considerable amount of time for the psychological scars to heal.

To illustrate the severity of the situation, let's dive into the statistics. From the beginning of 2021 until September 20 of the same year, a total of 507 regular equity funds reported only 37 positive returns for investors, which translates to a mere 7.3% success rate. The average return for these funds was a staggering -31.96%, and the median return was even worse at -35.37%. Similarly, among 1,468 hybrid equity funds, only 48 managed to report positive outcomes, yielding an abysmal average return of -36.51%, with a median return of -38.72%. Even in the 1,865 flexible allocation funds, only 350 saw profits, which was less than 20% of the total. This group recorded an average return of -22.85% and a median return of -25.76%.

Investors are generally aware that equity funds come with high risks and can experience significant volatility in the short term. However, the prolonged duration of losses has likely pushed many investors to their breaking point. Frustrated with their investments, it is not uncommon for retail investors to redeem their funds at the slightest hint of recovery, thus contributing to a downward spiral in the market.

One major contributing factor to the poor performance of equity funds is the industry’s overemphasis on short-term gains. In an effort to scale quickly, fund companies often prioritize short-term performance over risk management. This can lead to excessive concentration in specific stocks or sectors that seem promising at the moment, such as the once-booming industries of alcohol, renewable energy, pharmaceuticals, and semiconductors.

When these sectors perform well, fund managers become rock stars, attracting substantial investment into their new offerings. However, the reality is that when market conditions shift—if those sectors begin to falter— fund managers find themselves in a predicament. The concentrated positions that previously drove large returns make it difficult to adjust or liquidate holdings if the market turns sour, forcing fund managers to watch their net values plummet day by day.

As the financial market matures, it is increasingly imperative for fund companies to account for investors' experiences. They must find ways to lower investment risks and minimize fluctuations in net values, delivering tangible returns for their clients. Despite the dismal performance of equity funds over the past few years, it remains essential for investors to maintain a certain allocation in equity funds.

Let me illustrate this with a hypothetical example. Consider an individual with 1 million yuan that was placed in a bank five years ago, where the highest interest rate possible was around 4.18%. This amount would yield approximately 41,800 yuan in annual interest. Fast forward to today, and that interest rate has dropped to 2.4%, generating only 24,000 yuan in interest per annum—over a 40% decline. To achieve the same interest income, the principal would need to increase to around 1.74 million yuan. In the absence of such a principal increase, the only path left is through investment in higher-risk assets capable of providing greater yields.

This year, the rapidly rising bond prices, driven by declining market interest rates, have largely attracted savings away from traditional bank accounts. This trend has led to a noticeable increase in the scale of bank wealth management products and pure bond funds. However, this yield model that relies on rising bond prices is unsustainable. Once bond prices stop appreciating, the returns from these fixed-income products could see a drastic reduction.

As returns from pure bond funds and bank wealth management products decline, maintaining reasonable returns becomes increasingly challenging. Thus, the only viable path forward is to enhance allocations in equity funds.

Looking at the data, the past three years and nine months have been bleak for equity funds. However, extending the investment horizon to ten years tells a very different story. Over the past decade, the median returns for equity funds—standard equity funds, hybrid equity funds, and flexible allocation funds—have been notably higher, at 104.9%, 82.78%, and 75.71%, respectively. The annualized returns during this period reached 7.44%, 6.22%, and 5.8%.

If we project that fixed-income products will yield an annualized return of around 2.5% over the next ten years, while equity funds yield between 6% and 7%, achieving a target annualized return of 4% would necessitate a strategic allocation of 43% to equity funds (with an assumed annualized return of 6%) and 57% to fixed-income products, or alternatively a 34% allocation to equity funds (with an annualized return of 7%) alongside a 66% allocation to fixed-income products.

Currently, the overall valuation of the stock market is lower than it was a decade ago, and with a bear market stretch exceeding three and a half years, the dawn of a bull market looms ever closer. This presents a golden opportunity to consider an appropriate allocation to equity funds, which could yield impressive results when the bull market resumes. Despite this optimism, it is essential for investors to maintain a long-term outlook and remain resilient in the face of potential short-term losses.