Equity has an image of being a very risky investment (only for those who don’t understand it completely) vehicle that somehow works in the long term. A look at past data and you will find startling results. Your chances of incurring losses goes down as your holding period goes up. If you held investment in the Sensex for at least 14 years, beginning any date in the past 30 years, you would have never lost your money.
Some startling numbers for long term. A simple, but arduous test performed on Sensex figures (closing end-of-day figures) since its inception on 3 April 1979 reveals some noteworthy points.
The test assumes you invested in SENSEX (taking the Sensex closing figures as the net asset values, or NAVs, of a mutual fund scheme) for a period of one year on any day between 3 April 1979 and till as recent as possible. At the end, the test takes an account of the number of one-year time periods where you made money and the number of one-year time periods where you lose money.
Next, the same exercise is repeated while increasing the holding period by a year till 30 years. So on the lower end, while the holding period is one-year, on the farther end the test also assumes that you invest for a time period of 30 years, anytime between April 1979 and till as recent as possible.
The lesser your time horizon, the more are your chances of making losses. For instance, if you had invested for one year, you would have made losses 2,026 times out of total of 6,784 one-year time periods between 1979 and till as recent as possible or 30% of the times.
On the other hand, as you increase your time horizon, your chances of making losses go down. For instance, investing for seven years or 11 years would have dropped your chances of making losses to 7% and 4%, respectively. In other words, your chances of making money go up to 93% and 96%, respectively.
Here’s the clincher: if you had invested in Sensex, India’s oldest stock market index, for at least 14 years, in any 14-year periodâ€”since its inception in 1979 till as recent as possibleâ€”you would not have lost any money. Out of a total of 4,189 14-year time periods since Sensex’s inception, you would have made money in all instances.
What about returns?
Although the average return between investing in any 14-year time period, right up to, say, 20-year time periods swings between 13.78% and 14.75% on average, the minimum return that you earn goes up as your investment horizon goes up.
If you invest for 30 years, the minimum you would have earned was 16% compared with a maximum of 18.22%.
Guaranteed returns over a 14-year time period sounds good on paper, but do we have the patience to stick around for 14 years?
Think over it because you may yourself be killing the Golden Goose i.e. Stock market’s with your impatience and over indulgence.