A listener to the Let’s Get Rich With Pattu podcast writes, ” What is the probability that a particular equity market (just the index) will perform well (beating inflation) in the long term? I can see all the examples taken comfortably from the US and India everywhere. But what about other equity markets? And what’s the guarantee that it won’t happen in India/US, or what is the probability of those happening in India/US, or how do you identify and find those?”
“Let’s take the examples one by one. Hang Seng Index – 16k in 2000 to 16k again in 2023 with 0 return, and investing at the top of the 2007 bubble means no recovery yet. FTSE 100 Index in London – around 6.5k in 2000 to 7.6k in 2023 IBEX 35 Index in Spain – 12k in 2000 to 10k in 2023 Dax in Germany – 7.7k in 2000 to 15.6k in 2023 – almost doubling only in 23 years which is just mere 3% return (but still far better than the other 3)”.
“Similar cases with CAC 40 in France, EURO STOXX 50, etc. Even in a country like China, which has been growing for a long time, the returns don’t look that great.
(And now, I can see people talking about China-like growth in India in the future. Will the equity performance also repeat here?). Considering all these, how should we see investing in equity and having equity in asset allocation when uncertainty is seen in so many other markets? Do we get our money back in equity?? How worthy is it to risk our capital for probable higher returns than PPF/EPF, where we get 7-8% returns (maybe 5-6% in future) just for beating inflation, considering we are not far behind inflation in dept.?”
Some of the questions can be answered without data.
“What is the probability that a particular equity market (just the index) will perform well (beating inflation) in the long term?”
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=> No idea!
“I can see all the examples taken comfortably from the US and India everywhere. But what about other equity markets?”
=> The Indian stock market history is too short. Even for the US market with its 123-year history (from 1900, data exists from 1870, but a worksheet cannot process the dates), we have shown that the returns swing wildly. We are not always inflation-beating with some negative long-term returns: Long-term investing in equity comes with no guarantees of success!
“And what’s the guarantee that it won’t happen in India/US, or what is the probability of those happening in India/US, or how do you identify and find those?”
=> There is no guarantee that a run of bad returns won’t happen in India. Also, an open-minded analysis with a scientific temper and nothing to sell would know that no such probability can be assigned. We cannot identify and find these except in hindsight.
But then again, why seek guarantees with equity investing? Most of our life-defining moves, like choosing a college, a job, a life partner, being a parent, etc., come with no guarantee of success. Yet nothing stops us from going ahead and making the most out of the situation as it changes. Equity investing is no different.
Yes, fixed-income instruments offer some return guarantee, which means they also guarantee a return well below realistic lifestyle inflation (not the official numbers) after tax! It must be kept in mind that instruments like PPF or SSY have investment limits, and EPF is taxable above Rs. 2.5 lakh. Also, see: PPF will not make us crorepatis! We need to take risks for that!
Yes, one can plan for retirement with only fixed-income instruments, but the higher capital required is the price to pay for lower volatility. Very few can afford it, leaving no alternative but to choose equity.
Why keep faith with Indian equity? It is hard to identify clear reasons for the poor show in other country indices. There are many factors to consider, which often boil down to opinions.
However, the basics are clear. The market moves up based on sentiment. For buyers to far exceed sellers, they need signals that businesses can remain profitable on a rolling basis soon without government interference. Political stability (stable government and no conflicts) and financial stability of the economy are also key factors.
Strong, growing demand for their products should exist for businesses to remain profitable. As shown earlier, a growing population is key to this: Can the Indian stock market keep falling like the Japanese stock market? Many believe India’s population is its problem. On the contrary, it is its biggest strength.
Retail and domestic investor participation is also key to lower stock market volatility. Foreign investors and traders can wreak havoc (Argentina is an example). Indian stock markets are possibly more stable (and less rewarding) now, thanks to retail and domestic investors long on equity. However, it is harder to prove this: Has stock market volatility decreased over the last two decades?!
I think there are at least two big challenges for India:
- The rich will get richer, and there is no stopping them. However, the poor should not get poorer. Their lifestyle should gradually increase. For this to happen, there should be significant long term investment in human resources and infrastructure.
- India should promote individuality in all fields, including sports, science, innovation, and entrepreneurship. Indian businesses should spread worldwide.
India ticks almost all the boxes for a thriving economy and stock market sentiment. So, there is a reasonable chance that Indian stock market returns would beat inflation (assuming we expect less and invest enough with a proper strategy). See: Equity MFs are too risky with no guarantees; why should I invest in them?
Economic growth may not always result in stock market returns. So we can’t keep investing and leave the fate of our hard-earned money to luck. We need a proper investment strategy that is independent of market conditions.
Long term investors must have a solid systematic risk management plan by gradually de-risking their equity exposure. Our research – explained in the goal-based portfolio management course and incorporated into the freefincal robo advisor shows that this has more than a reasonable chance of success regardless of market conditions. This is also explained here: do not expect returns from mutual fund SIPs! Do this instead!
Such a gradual and systematic equity de-risking is the margin of safety that will make our chances of success reasonably independent of future market conditions and their forecasts.