Will long-term equity investing always be successful?

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If we ‘hold’ equity for the ‘long term’ are we assured of beating inflation with a real return? Will equity beat all other asset classes if we wait long enough? Will long-term equity investing always be successful?

Equity as an asset class is sold to investors with an ‘yes’ to such questions. Sold either directly or indirectly via all types of media. Yesterday, the nifty valuation charts showed us that the average values of PE,PB and dividend yield are changing as each day goes by. I would like to dwell on this theme of change for the next couple of days.

Notice the evolution of the Sensex PE.


The max PE observed prior to each crash seems to be decreasing with the passage of time.Thanks to Balaji Swaminathan for pointing this out. I do not wish to read too much into this, except to say that the definition of a ‘high PE’ changes each day which could well impact PE based market timing models – the anchor is moving.

Now a look at a couple of slides I use in the investor workshops.  The first is a salesman’s dream and can be effectively used to convince a new equity investor.

The average maximum and minimum return for every 3,5,7,10,15,20 and 25 year period between 1979 and 2013 have been plotted. Notice how, with increasing investment duration, the volatility (here measured as the difference between max. and min. return) decreases. Does this mean, we can expect the same trend over the next 25, 30 years? Does this mean we can expect a 15-16% return if held for long enough time?

Many of us conveniently forget that our markets are simply too young. There is not enough data points to establish any ‘concrete’ trends.

Take the case of a much older market – the S&P 500. Here one can get 125+ 25 year data points in a rolling return analysis!

long-term-equity-investing-3The above graph where the different between the maximum return and minimum return has not changed much between a 10-year investment and 25-year investment tells me the following loud and clear: 

1) do not expect volatility to come down (too much) with time. 

2) Do not assume that holding for the long term will make everything go away.  It may or it may not.

3) Remember our market is too young and is still evolving. There no absolute rules or thumb rules.

Question is, how to handle this? I can think of two ways:

  1. Time the market for lowering portfolio volatility- this may or may not result in higher returns (see link below)
  2. Do not time, invest systematically, but rebalance from to time to time, with a focus on the financial goal. This includes shifting to safer asset classes depending on market movements in the last 10 years or so before the money is required.
  3. A mix of  the two

In both methods (1,2), you do not trust the market to deliver over the long-term, but trust it to take away the gains it has offered sooner than later!

I dont care which is superior, but I do know which is suitable for me – 2 (which is anyway mandatory for everyone).

When it come to equity investing, hope is NOT a strategy.

More about change in stock market trends and timings models: Is it possible to time the market?

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. sir,
    if can i assume from 2, you are saying that in the past 2 3 years bull market i should have booked whatever gains i have from mutual fund and move that amount to debt or fd ?

    also is ulta true ?. during dull market move from debt to mutual fund ?

  2. Long term market(benchmark index like sensex etc) will track nominal gdp growth.Past 25 years return would not be repeated as nominal gdp would be in region of 10% (5% real growth + 5% inflation).So obviously equity returns would be lower than in the past,but will debt outperform equity ,highly unlikely.Recently in a tv show a similar argument was bought by a market analyst.He was speaking with respect to S&P 500 and how since 2000 it has hardly moved.I did some googling and found that S&P 500 returns including dividends since its 2000(dot com boom ) had given 3.75 cagr nominally(1.66 in real terms).Is it high or low ?Well that question is relative.10 yr US treasury yield (a proxy of US debt) avg returns over the same period is 3%.

  3. As most of us are hoping to create a decent corpus (for whaterver the goal), the question is: Can we take ‘invest’ /’redeem’ /’switch’ decisions based on the Nifty PE if we are prepared to ignore overshooting on either side after we have acted. If the answer is ‘Yes’, then we needn’t go any further. 15 on lower side and 25 on higher side is what the long-term Nifty PE chart would indicate.

  4. I leave the re-balancing activity to the fund manager – by investing in Equity Oriented Balanced fund(s).
    Just want the NAV to grow 🙂

  5. Freefin is a fantastic website for small investors like me. There was one small request I have … would you be able to help me with some method of finding out if voluntary retirement is a viable option for working people? Is there any calculator by which we could key in the variables and see the results?

  6. Dear Sir,
    are you adding volatility & inflation factor in this calculation?cause CAGR of 34 year 79 to 2013 April to may 16%.
    If we take data till 2016 in rate fx in excel also getting 16% where did you arrive sensex return 5%? Could tell me how did we arrive 5% ?I guess you have added volatility factor.

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