Do you worry about investing in the equity markets because you hear that it’s very volatile and that you could end up losing money? That’s true and very much possible. However, it is important to understand that the probability of losing money is high when you have a short term investment horizon. In reality the Equity markets are relatively stable and generate robust returns in the LONG RUN. The equity market is by far the best investment option for the long term investors. You however need to have a 20+ year investment horizon. If you have a smaller horizon you could end up being very disappointed by the markets and may give up on one of the best long term wealth compounders that exists.
I have taken the BSE Sensex data from 1979 (earliest possible) to 2017 to make my point. That’s 38 years of data.
BSE Sensex CAGR across different time durations
Refer the chart above: in one year you could end up making a 93% return or you could lose 52% of your money. Most people these days think of 5 years as long term but after 5 years too you could lose money – albeit a smaller amount – 1.8% IRR. For instance – this would have happened if you had invested money in 1993 and exited in 1998.
Even the 10 year returns have been disappointing in the past. However once you hold on for 20 years and longer the returns look good ! You will notice that the gap between the Highest returns and Lowest returns start to decrease over longer investment horizons. Your investment starts to become stable. It does not matter when you enter the market and when you exit.
If you look at the 35 year period – we went through the Harshad Mehta scam in 1992, the global financial crises of 2008 and a bunch of smaller crashes and yet the lowest return you could have made is 14.57%. That’s a pretty good Compound Annual Growth Rate (CAGR) to have with minimal tax burden. To understand the awesomeness of these numbers let’s say that you invest a lump sum of 5 lakhs and wait for 40 years
5 Lakhs at 14.57% Compounding
| Years | Interest Rate | Amount | Amount in words (Rounded) |
|---|---|---|---|
| 0 | 14.57% | 5,00,000 | 5 Lakhs |
| 5 | 14.57% | 9,87,016 | 10 Lakhs |
| 10 | 14.57% | 19,48,404 | 19 Lakhs |
| 20 | 14.57% | 75,92,560 | 75 Lakhs |
| 30 | 14.57% | 2,95,86,759 | 2 Crores 96 Lakhs |
| 40 | 14.57% | 11,52,93,952 | 12 Crores |
Your 5 lakhs has become nearly 12 crores ! The amount would have been way way smaller had you invested your money in a Bank FD or any other sort of debt instrument. You can read in Should you invest in Fixed Deposits (FDs) or Mutual Funds? Also read more about the The Power of Compounding.
Refer to the below table if you prefer to look at the raw data used to compile the returns across different time horizons in the chart above.
BSE Sensex Raw Data Since 1979
Next Steps
Hopefully I have managed to convince you to invest in the equity market for the long term. Now as the next step I strongly recommend you consider Equity Index funds for your investments. Read more about Index Funds in India.
