How much return can I expect from the stock market? What is long-term in the stock market? What is the risk associated with the stock market? Regular readers may be aware that I have discussed these questions with returns and risk spreads from time to time. In my most comprehensive analysis, Sensex return charts for the last 35 years along with the return distributions are presented. These provide a visual representation of stock market risk.
Usually, the no of data points considered to plot the stock market risk-reward spectrum is only a handful. See this earlier study for example: What Return Can I Expect From Equity Over the Long term? Part 1
Using the rolling returns calculator, we can look at 1,2,3,4,.5, …. 30,31,32,33,34,35 year Sensex returns on rolling basis. From 8,649 one-year data points to 739 35-year data points. An overall total of 1.58 lakh data points.
Before we begin some important considerations
If you are a mutual fund sales guys do not waste your time reading this post. No one will buy equity mutual funds if you tell them about risks. The problem is that investors and many advisors simply assume “systematic” buying is all that is necessary to get “good returns”
- Our markets are quite young and we were a developing country (less so now). This means that the long-term past performance will always be rosy. Please be cautious about extrapolating it into the future.
- Our long-term market returns are heavily influenced by the Harshad Mehta scam – a proper bubble, not just a bull run. You can the tool in this post to understand its impact: Understanding the Nature of Stock Market Returns.
- The returns before FII investing began are of a different nature. Today all economies are heavily inter-linked.
- Our fixed income in the past was truly fixed. Only recently it has become market linked. This will have an impact on equity too from now on. The penetration of corporate bonds was weak in the past.
- Over-confidence is a common investor trait. Expect no more than 10-12% returns from equity and that too over 10 years and that too with risk management.
- Do not believe what product sellers will tell you. A Mutual Fund SIP is Hope, Not a Strategy!
- Understand the difference between probability and possibility. You should be worried about the possibility of losing money and not the probability of losing money. You should be worried about the possibility of poor returns and not about the probability of poor returns whether it is long-term or short-term.
- Wait for the results for a well-developed country with a longer market history before assuming that “equity will work over the long-term” – will consider S &P 500 rolling returns next week. You can check out an earlier study here: Will long-term equity investing always be successful?
- Some people make a song and dance about Indian equity never giving -ve returns over 15 years. Well, when you collect 5171 15-year data points and notice that 250 of those are single-digit returns, it pulls you down to Earth. What is that, only 250 you say? Please go back to point 4 again, please.
- RISK DOES NOT DECREASE OVER THE LONG TERM!! That is the central message of this post/
- I am not against equity investing. This is only a caution to invest with the expectation of risk and not with the expectation of returns.
- Do not believe the nonsense about compounding in equity occurs over the long-term. There is no compounding in equity (or gold, or Bitcoin or a debt mutual fund)
- Returns from any market linked product depend on two things: (1) the period over which you stayed invested (SIP or lump sum does not matter) and (2) how well you managed risk during the investment period. What you see below are lump sum returns for unmanaged risk. Treat this post as a not-so-gentle reminder to recognise risks and manage them.
- And Please do not say, “SIPs will be better”. No, they will not – Dollar Cost Averaging aka SIP analysis of S & P 500 and BSE Sensex
- Why am I repeating myself when I have already shown the essential findings before? Because this study with about 1.5L return calculations is by far the most comprehensive I have done so far. And it never hurts to (a) be thorough and (b) provide a warning to a new group of readers.
- That said, most people who read this probably will not understand, or worse not want to understand just how risky unmanaged equity investments can be. People see what they want to see and worse take their few years experience of equity investing a bit too seriously. Anyways this analysis is a scratch that I had to itch.
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