Stock market investment risk will not reduce “over the long term”!

Published: August 9, 2019 at 9:46 am

Last Updated on December 29, 2021 at 4:56 pm

The mutual fund industry has a simple sales mantra. Tell investors not to worry about market volatility because everything will turn out okay in the end! Even the NSE said market volatility is temporary! Thanks to a largely ignorant media, investors are fed on a constant diet of “don’t stop your SIPs if you want to grow wealth”. Sorry, stock market investment risk will never reduce for meaningful “long term” investment durations.

The only way to “build wealth” is to manage risk systematically, not merely invest each month and assume that is enough. See: Myth Busted: SIPs do not reduce risk or enhance returns! Also: Simple Steps to De-risk Your Investment Portfolio  and How to systematically reduce the risk associated with a SIP

Stock market investment risk

Even if you are not a sales guy it is quite easy to get fooled by a chart like this, published earlier: Sensex Charts 35 year returns analysis: stock market returns vs risk distribution

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

To get this, we look at every possible 5,6,7,…33,34,35 year return period for the Sensex, compute return, pull out and plot the lowest (min) and highest (max) return. This is return spread is a simple way to understand stock market risk. This is an “excellent” graph for a mutual fund distributor to use. Hey, look at that max, and min return lines merge “over the long term”. This is why you should keep your SIPs running.

Recall this quote?

if you torture the data long enough, it will confess to anything

Well, the truth is that you do not need to go into all that trouble. Just reduce the sample size and often you get the result that you want. In this case, the sample size is the available stock market history. We have data only from 1979.

To claim something as dramatic as “stock investment risk reduces with time” we need data going a lot further back in history (assuming we want the truth and not a slide to sell). So let us take a look at  S& P 500.

I was able to procure (for a fee) S & P 500 price data from 30th Dec 1927. Hence the above study can be repeated for every possible 1 to 55 years and allows me to better a previous study: Will long-term equity investing always be successful?


I could not get daily total returns data from 1927, a comparison of the above and below graphs would tell you that it does not matter much. At first sight, you would argue that stock market investment risk does reduce over the long term.

S & P-500-Rolling-Return-Max-Min-Return-Analysis-full-data-set
Hang on. Less than 5-year return spreads dominate the graph. So let us get those out of the way. Now, look carefully.

Even with dividends, negative returns are possible up to two decades of investing! Yes, yes, the gap between the max and min returns decreases. However:

  1. The drop is only from 5 to about 27 years.
  2. Even at 15, 20, 25 years, the spread in returns is too high. Yes, the risk is lower than say five years, but it is not small enough to blindly keep investing! Ever heard of the saying, “a miss is as good as a mile”?
  3. Now for the critical observation: Notice that the gap bet max and min returns from years 27 to 55 y is pretty much the same.

Points one and two above should be enough to convince an investor that “long term investing” is not less risky – at least as it is marketed. Point 3 is proof for the unbiased analyst.

Please do not ask “what is the probability of a positive or negative return over the long term?”. Such things cannot be computed. Well, they can be, but it has no meaning.

Also (1), don’t start about the above being lump sum returns and SIP will lower risk. No, it will not. See: Myth Busted: SIPs do not reduce risk or enhance returns!

Also (2),  India is not different! We live in an interconnected world. A recession in other countries will spill over to us and dent “long term return expectations”. So the picture shown above for Sensex is likely to change into the one for S & P 500. At the very least, a good risk manager would expect that.

When people read such posts, they assume I am trying to scare people away from equity. I gain nothing from it. I am merely trying to point out that merely dreaming that investing each month will lead to wealth and inflation-beating returns is unfounded. Any portfolio linked to the market must be managed systematically.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)