EQUITIES ARE BEST BET IN LONG-TERM!

EQUITIES ARE BEST BET IN LONG-TERM!

Here is interesting piece of analysis and equally significant from an individual’s investment perspective.

Most of the time people ignore equity being high risk and high return investment category. Investment in equities require excellent understanding of stock market, deep study of individual companies, risk appetite, holding capacity (in case share prices drop considerably before picking up). People who tend to invest in equities have a mindset that the money should multiply in quick time without understanding the downside risk.  

How this risk component can be mitigated in such a manner that one can get good returns? There is way out. A diversified Equity mutual fund is one of the options. These funds would try and outperform (some time underperform) the benchmark index. In Indian context, the benchmark indices are BSE-30 (Bombay Stock Exchange) and NSE-50 (National Stock Exchange). The number in the end denotes the number of companies in the index.

How about a portfolio which would mimic the returns provides by the benchmark index? Such funds are called Index Fund. A BSE Index fund would typically copy the portfolio of the underlying BSE index. Index funds came into existence recently. BSE started somewhere in late 70’s.

Let us assume that the Index Fund existed in those times. With this assumption, I have tried to calculate the returns delivered by the BSE. These returns are rolling returns compounded and annualized (CAGR). 

The data used is from 2^nd Jan 1980 to 29^th Oct 2014 period taken from BSE website. The strategy is BUY and HOLD.

So if you invest on 2^nd Jan 1980 and withdraw after 5 years on 31^st Dec 1984 where index changed from 118.16 to 271.87, the CAGR works out to be 18.13%. So on if you invest on 4^th Jan 1980 and withdraw on 2^nd Jan 1985, the rolling CAGR works out to be 18.00%.

So in rolling return analysis, I am assuming you invest on any day and withdraw after 5, 10, 20 or 30 years. This way we take out “Timing the Market” philosophy. So there are instances when you could end up investing at the peak and 5 years rolling return could be massive –ve. Here is how this fares on high level

BSE-30 Data From 2-Jan-1980 to 29-Oct-2014	*-Ve Return Instances	Maximum -ve Return	Maximum +ve Return	Minimum +ve Return
5 Year Rolling Returns	651	-8.08%	56.24%	0.01%
10 Year Rolling Returns	53	-2.72%	34.98%	0.02%
20 Year Rolling Returns	0	NA	21.52%	7.03%
30 Year Rolling Returns	0	NA	18.50%	14.80%

So in 5 year rolling return period, there are 651 instances where you could end up losing money but as you go up and invest for longer term the returns stabilize over longer term. Remember this is BUY and HOLD strategy. If we couple this with cost averaging strategy, then the returns are phenomenal. I will write about that in my next article. 

These returns, in Indian context, are tax free (No long term capital gains tax on equities in India) and are incomparable with other investment avenues.

Here is graphical representation of the analysis.

So you will also agree that  EQUITIES ARE BEST BET IN LONG-TERM!!!

Note: If you want to see the details of analysis done in excel, please feel free to drop me a note on Sudarshan.Rajhansa@gmail.com