Gold beats Sensex over last 20 years! Time to invest in gold?

We compare long term lump sum and SIP returns of Stocks vs Gold vs Bonds to find that 20-year Sensex Returns are now lower than Gold (perhaps for the first time)

Published: April 17, 2020 at 11:38 am

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Perhaps for the first time in its history, Sensex 20-year returns are lower than Gold! This is a stocks vs gold vs bonds comparison and what it implies for investors.

We compare rolling lump sum and SIP returns of Sensex TRI (dividends included) from 19th Aug 1996, I-BEX (I-Sec Sovereign Bond Index) from 1st Aug  1994 and Gold INR per troy ounce from 2nd Jan 1979. The Gold data is sourced from the World Gold Council. The Sensex TRI and I-BEX data are sourced from ACE MF.

Articles such as this and ones like Ten-year SIP Return of Most Equity Mfs is now less than 10% and 15-year Nifty SIP returns crash to 8% (51% reduction since 2014) and After biggest intraday fall: 10-year Nifty SIP Return is 2.3%, 14-year SIP Return is 5% have a singular purpose: to illustrate the dangers of unmanaged “long-term” investments.

Many readers point out that such comparisons are made “at the wrong time” and after a stock market crash, this is to be expected. The point is, stock market crashes have to be accounted for in our plans and when it comes to risk management, it is important to cherry-pick bad instances such as the one currently unfolding and prepare for it. Only AMCs and sales guys would talk of “look at the average performance” because they cannot sell equity MFs at a time like this.

Sensex vs Bonds vs Gold

A graph such as this provides just one return data point ( start date, end date) and should not be used to judging an asset class!

price movement of Sensex Gold and G-secs from Aug 1996 to April 2020
Price movement of Sensex Gold and G-secs from Aug 1996 to April 2020

Five years (lump sum)

Five year lump sum rolling return comparison of Sensex Gold and bonds
Five-year lump sum rolling return comparison of Sensex Gold and bonds

Since Jan 2010, there have been two periods where Gold and the Sensex 5Y returns have moved in opposite directions. This can also be seen in the 5Y SIP data below.

Five years (SIP)

Five year rolling SIP return comparison of Sensex Gold and bonds
Five year rolling SIP return comparison of Sensex Gold and bonds

While this looks tempting to include gold in the portfolio, it would be hard to have two players with comparable volatility capable of giving negative returns over 5Y (hopefully at different times) in the portfolio.

How many investors would have the mental strength to rebalance their portfolio, in particular book profit from a well-performing asset and buy and poorly performing asset? Many do not rebalance fearing tax and exit loads!

Ten years (lump sum)

Ten year lump sum rolling return comparison of Sensex Gold and bonds
Ten-year lump sum rolling return comparison of Sensex Gold and bonds

Both Sensex and Gold 10Y returns have fallen through most part of the last decade.  Currently, all three asset classes are close to each other. It is important to appreciate that the bond index represents the market value of long term gilts. Returns for a buy and hold bond investors could be lower than this and subject to reinvestment risk.

Also, the returns are before tax and expenses. Over ten years, this gives Sensex a marginal edge over gold. It is not possible to see any anti-correlation in the above graph.

Ten years (SIP)

Ten year rolling SIP return comparison of Sensex Gold and bonds
Ten-year rolling SIP return comparison of Sensex Gold and bonds

Even after tax, the current 10Y Sensex SIP return is likely to be lower than that of Gold and bonds. Bond returns lie between that of the Sensex and Gold since the last few years. The opposite trends of stocks and gold have a fairly short history in India compared to the US: Gold is riskier than Stocks! The USD INR exchange trend has played a key role in this as noted before: Gold Price Movement: USD vs INR.

Fifteen years (lump sum)

Fifteen year lump sum rolling return comparison of Sensex Gold and bonds
Fifteen-year lump sum rolling return comparison of Sensex Gold and bonds

Fifteen years (SIP)

Fifteen year rolling SIP return comparison of Sensex Gold and bonds
Fifteen-year rolling SIP return comparison of Sensex Gold and bonds

We do not see up and down “cycles” here due to the lack of history. Both the Sensex and Gold return has consistently dropped for the last ten years. The current 15Y Sensex SIP return is well below that of gold and bonds.

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Twenty years (lump sum)

Twenty year lump sum rolling return comparison of Sensex Gold and bonds
Twenty-year lump sum rolling return comparison of Sensex Gold and bonds

Twenty years (SIP)

Twenty year rolling SIP return comparison of Sensex Gold and bonds
Twenty-year rolling SIP return comparison of Sensex Gold and bonds

Again, the duration is too short to spot any patterns other than to state the obvious: the title! Even the great and wonderful equity SIP has crashed below that of gold

What do these results imply? What should investors do?

Simple systematic investing for the long-term will not work. Unless we have a de-risking strategy to gradually and continuously eliminate equity allocation from our portfolios, the amount we end up saving for our financial goals would be left to luck!

Someone in FB group Asan Ideas for Wealth reacted, “Yes, there are times WHEN gold outperforms but most of the times equity outperforms”. The only long term internal for which we have sufficient data to say something is ten years and no one can confidently say equity outperforms most of the time over ten years. For the mutual fund industry, five years is long term!

This is US data and there is no clear winner here either!

20Y lump sum rolling returns of S and P 500 in USD vs Gold in USD
20Y lump sum rolling returns of S and P 500 in USD vs Gold in USD

Please do not look at last 25Y or last 30Y data. When this can happen in six years – 15-year Nifty SIP returns crash to 8% (51% reduction since 2014) – anything can happen in the next 25Y!

Should we add gold in our portfolio? First of all, if you add it now, your return going forward could be significantly lower. This is a fantastic time to increase equity investments. That is what, “20-year Sensex Returns now lower than Gold” conveys!

Second of all, unlike the US (see above) even crude anti-correlation between gold and equity movement over the long term has only now begun to emerge for India perhaps because the exchange rate has stabilised (see reference above).

Assuming this will continue in future, we perhaps now have a case for including gold in our portfolios. Not via Sovereign Gold Bonds (see When to use and when not to!) but via liquid gold ETFs or gold funds.

However, the associated maintenance, discipline and resolve required to maintain a three asset class (gold, stocks, bonds) portfolio is a considerable ask for most investors and even advisors.

Yes, a multi-asset fund is a good, tax-efficient choice, but it must the only kind of fund(s) in the portfolio – again impossible! And one could find investors complain about the day to day volatility of these funds! Can’t eat the cake and expect to hold it too!

 

 

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