What Return Can I Expect From Equity Over the Long term? Part 1

How much can I expect from equity as an asset class for long-term goals?. This is a question one often hears from first-time investors, especially those who are migrating from the comfort of fixed deposits or real estate.

Unfortunately, answers from experienced equity investors are steeped in hindsight bias. They often extrapolate their own good fortune into the future.  Answers from salespersons cannot be vague. I have seen advisors state, "invest and after X years you will definitely get Y returns"!

The plain and simple academic fact is: returns can swing so much, that one cannot really expect anything.

That said, as Dr. Uma Shashikant once responded to Swapnil kende's question on why should equity beat inflation?,

business borrow money at rates comparable to inflation.  Since a society has certain needs on a day to day basis, businesses cater to those needs. If businesses have to survive, they must profit. Meaning shareholders will get returns higher than the rate of borrowing.

Thus one can say with reasonable certainty, that given enough time, returns from equity will beat inflation. By how much, is something that cannot be said for sure.

Let us try and answer this the titular question in two parts. First, let us look at rolling CAGR returns of the Sensex total returns index for different durations from 1979 to 2012 (too lazy to add the last two year data points!).

In this post, I do not wish to add much commentary. I request you to please look at the data to get an idea of how much equity return (from large cap stocks) can fluctuate.

In the second part, we shall analyze this data. These are slides that I showed in the Chennai and Bangalore investor meets.

Slide1

 

The price index and total returns index in normal and logarithmic scales (below). Notice that market has risen and stayed flat for extended periods. So the returns are typically clumped and not steady. Sequence of returns, matter. A person investing at at the start of a sideways market may have different view of equity than one who started along with the start of a bull run.

Now let us look at the rolling returns for different durations.

3 year rolling CAGR

Slide2 (1)

 

5 year rolling CAGR

Slide3

 

7 year rolling CAGR

Slide4

 

10 year rolling CAGR

Slide5

 

15 year rolling CAGR

Slide6

 

20 year rolling CAGR

Slide7

 

25 year rolling CAGR

Slide8

Don't get fooled by what AMCs and advisors tell you. Zero negative return periods mean nothing. Notice how much the returns can swing (difference between lowest and highest returns) , especially for 10, 15, 20 and 25 year periods.

Based on this data, can you answer:

How much can I expect from equity as an asset class for long-term goals?

We will dig deeper in the second part .

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45 thoughts on “What Return Can I Expect From Equity Over the Long term? Part 1

  1. moronbuffet

    couldn't resist responding to this post

    1. What Return Can I Expect From Equity Over the Long term?

    a) 0% c) =0% d) anything e) All of the above.

    My choice is e)

    2) given enough time....

    given enough time, 100 random character generators will almost surely can generate the entire bible!

    given enough time, mountains will flow before the Lord (Deborah number and the australian pitch drop experiment)

    Reply
  2. moronbuffet

    couldn't resist responding to this post

    1. What Return Can I Expect From Equity Over the Long term?

    a) 0% c) =0% d) anything e) All of the above.

    My choice is e)

    2) given enough time....

    given enough time, 100 random character generators will almost surely can generate the entire bible!

    given enough time, mountains will flow before the Lord (Deborah number and the australian pitch drop experiment)

    Reply
  3. moronbuffett

    1. What Return Can I Expect From Equity Over the Long term?

    a) Less than 0% b) Equal to 0% c) Greater than 0% d) Anything e) All of the above.

    My choice is e). all are possible depending on the window of time frame you are caught in.

    Reply
  4. moronbuffett

    1. What Return Can I Expect From Equity Over the Long term?

    a) Less than 0% b) Equal to 0% c) Greater than 0% d) Anything e) All of the above.

    My choice is e). all are possible depending on the window of time frame you are caught in.

    Reply
  5. Bala

    My problem in understanding equity is my money is not going into businesses as everyone is explaining. A very small portion of my money is into the business and most of the money is only premium with the hope that someone else will buy my shares at a better price at a future date. Unless you have bought shares at face value and you thrive on dividends market is just speculation. What say ?

    Reply
  6. Bala

    My problem in understanding equity is my money is not going into businesses as everyone is explaining. A very small portion of my money is into the business and most of the money is only premium with the hope that someone else will buy my shares at a better price at a future date. Unless you have bought shares at face value and you thrive on dividends market is just speculation. What say ?

    Reply
  7. Shankarnarayan K

    @Bala, you pay a premium for any quality product , similarly a quality share (read quality business) requires you to pay a premium as well. Simple.

    Reply
  8. Shankarnarayan K

    @Bala, you pay a premium for any quality product , similarly a quality share (read quality business) requires you to pay a premium as well. Simple.

    Reply
  9. PV Subramanyam

    i am not even talking of yearly returns I am talking cagr over say 10-15 years. So you could see a +52% and -38%....:-) and in no year you may see 13....but cagr could be 13...:-)

    Reply
  10. PV Subramanyam

    i am not even talking of yearly returns I am talking cagr over say 10-15 years. So you could see a +52% and -38%....:-) and in no year you may see 13....but cagr could be 13...:-)

    Reply
  11. Nexus Bharath

    Hello Pattu .. Thanks for analysis .. A small request, why don't you include debt/FD return ratios during same period , if possible inclusive of Inflation ratios. That should show how much really equity scores over debt/FD ?

    Reply
  12. Nexus Bharath

    Hello Pattu .. Thanks for analysis .. A small request, why don't you include debt/FD return ratios during same period , if possible inclusive of Inflation ratios. That should show how much really equity scores over debt/FD ?

    Reply
  13. Ram Kumar

    [Pardon me for such a basic question].. what is meant by [3,5,7..25] year rolling CAGR? I know about CAGR but couldn't completely understand the term rolling cagr.

    Reply
  14. Ram Kumar

    [Pardon me for such a basic question].. what is meant by [3,5,7..25] year rolling CAGR? I know about CAGR but couldn't completely understand the term rolling cagr.

    Reply
  15. mani

    Returns 3 Years 5 Years 7 Years 10 Years 15 Years 20 Years 25 Years

    Negative 4 out of 32 2 out of 30 1 out of 28 0 out of 25 0 out of 20 0 out of 15 0 out of 10
    Lowest -11% -2% -2% 3% 8% 12% 15%
    Highest 50% 45% 36% 30% 26% 21% 20%

    As the investment horizon increases, though lowest return keeps growing, highest return is on a diminishing path. So, is there an ideal investment horizon, say 10 years.

    Reply

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