“Invest in Equity for Long term” You might have heard this sentence from me and others numerous number of times, but have you ever thought, why I say so? Or what is the logic behind that? What is the authenticity of what I say? Why should you believe me? Hence, I came up with the most time consuming article of this blog till date. Lets explore the world of Equity today and I will show you some amazing numbers and graphs which will change your perception about Equity.

To make this article Crisp and short, I will show you 4 charts and explain each of them that will show you Power of Equity. Mainly the idea of this post is to show you the return potential of Equity in Different time frames and to find out what is the kind of return we should expect from equity in Long run like 15-20-25 yrs. For the sake of calculations and source of reference, for almost all of the article I have used value of Sensex Index, but it should be almost similar for any Index Fund, ETF, or a Equity Diversified Mutual fund.

All the below study is based on historical 30 yrs of Sensex data from the year 1979.

1# Sensex Return Chart

Sensex has returns close to 18% CAGR in the long term till date for One time investment and SIP investment.

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This chart shows you the CAGR (Compounded Annual Growth Rate) return of Equity after each passing Month. I have manually noted down the Index value for each month starting from Mar 1979 – Sept 2009 (total 350 months approx) and then did some number crunching (actually a lot) and came up with the CAGR returns the index has given for that time frame. For example, for the month 36, the Index value was 218.82 and my starting Index value was 122.23 (Sensex actually started from 100, but I had a little late data). So the actual return was 23.16% for SIP investment and 20.78% return for one time investment. So this chart shows that if you had Invested your money in the start and then hold it for a particular time frame then what will be your CAGR return till that point.

The chart shows the return for two kinds of Investment modes: SIP and One time investment. So Blue line shows the CAGR return if you did SIP investment and the RED one shows the CAGR return if you had invested in Start and sold after ‘n’ number of months.

View Data

Points to Note

- In the Short term, returns have Wild Swings which is the basic nature of Equity
- In the long run, returns were in the range to 18-23%, where it goes up and down because of Bull and Bear markets. See Nifty PE Analysis
- SIP performed better than One time for starting 4-5 yrs and then SIP and One time investment were close enough.

2# Nifty Return Chart

Nifty has given returns close to 18% for SIP investment and close to 12% in 12 yrs from 1997-2009 .

This one is similar to the above chart just that it is for Nifty 12 yrs data. This chart shows you the CAGR return of Nifty after each passing Month. I noted down the Index value for each month starting from 1979 – 2009 (total 146 months approx) and came up with the CAGR return the index has returned up to that point. For example, for month 120, the actual return was 23.33% for SIP investment and 13.17% return for One Time investment. So this chart shows that if you invested your money in the start and then hold it for that particular time frame then what will be your CAGR return till that point?

View Data

Points to Note

- You can clearly see that the returns kept increasing with Tenure and there were less wild swings up and down with Returns.
- SIP performed better than One time Investment in all the time frames. See that blue line was always higher than Red one for any given month.

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3# Absolute Average Return for Each month (Sensex Data)

This shows you how much of absolute average return in percentage terms would you get if you hold your investment for X months.

This is an interesting Chart. It shows how much of absolute return can you expect when you hold your Equity investments for 1 month, 5 months, 50 months or 200 months. I will tell you how each duration is calculated. Let’s say duration is 12 months, so what I did was that I took all the 12 months time periods like Apr 1979-Apr-1980, Mar 1979-Mar-1980, June-1979-June-1980 and like this the last 12 months time duration Sept-2008-Sept-2009, total of 113 different values, then calculated the Returns for each time frame and calculated the average of those 113 time frames. I finally got average returns of 12 months Investment horizon (total 113 values for 1-13, 2-14, 3-15 month Index value). So I got a single value of 25.60% for 12 month time frame. This is absolute Return and not CAGR return. So, if I invest 100, I get 125.60 as return.

Please make sure that you understand that this 25.60% is the simple average of 113 values, there might be many values which may be negative, 0, or may be 100%. But we are more interested in what is the average of all such values.

In the same way the Absolute Average return for 120 months was 672.60%, which means that 100 invested would have become 772.60 in 5 yrs. Please understand that we are just trying to show this as the time frame increase the return potential of equity goes up and up. Don’t interpret it as the return guarantee for any time frame. It’s Equity, Respect it else it will punish you badly for your Ignorance.

View Data

Points to Note

- In the long run, the average return has increased
- For close to 15 yrs, the returns on Equity kept increasing but at a lower speed.
- from 15 yrs to 29 yrs, the Absolute return increased very fast
- So the real power of equity comes with long term.

4# Number of Times the return from investment was Positive for some time Frame (Sensex Data)

This graph shows that how many times an investment has returned positive for some particular time frame, for example for 4 yrs time frame (48 months). There would be many 48 months time frame like Mar-1979-Mar-1983 OR Jan-1994-Jan-1998 or any other date, out of all those 48 month time period, the investment gave positive returns for 87.36% times. So this graph shows how the number of times went up and up as the time duration was more and more.

For a particular time frame like 50 months, I calculated returns for all possible 50 month window and then saw how many number to times it gave positive return and then divided it with total number of times to get the percentage of times, the return was positive. So if there were total of 200, “50-month” period and 180 times the return was positive. The result would be 90%. I did this same thing for every time duration from 1-300 months and plotted the graph.

View Data

Points to Note

- One an average the chart was rising, which kind of proves that Risk of losing in Equity decreases as time duration increases.
- After 11 yrs, there was no instance when equity return was negative, which means that you invest any time in Sensex index and take your money out after 11 yrs, you will not lose. The return would be positive always.
- For smallest time frame of 1 month, the percentage was around 55%, which shows that for smaller time frame the equity returns are random like coin toss which is 50%-50% possibility. But as time horizon increases its more of power of Equity, rather than randomness.

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Conclusion

Many people are afraid of Equity because it can give negative returns, which is 100% true and possible, but people do not understand that its not a short term wealth building asset class. Its some thing for long term. When you invest in Equity for Long term, you are bound to get excellent returns given that you have faith on Statistics, Historical performance and the concept of Equity in general. You can also maximize your investment performance by active participation in your investment and honouring Asset-allocation and portfolio re balancing from time to time.

Time spend and tools used to this article

You might have spent 20-30 min to read this article, but I spend close to 25-30 hours on

- Finding data
- Doing calculations
- Making Computer program in Python: See the Python Code written by me for this article
- Making Charts in Excel, See Chandoo.org for excellent Tips
- Actually Writing this article

Comments Please, I would like to hear your views on this article and your views on Power of Equity. Is there something to be added? And Did this article succeed in changing your views about Equity or not?

Note : I will be on vacation now and will keep posting some articles whenever I get time .=”

Avinash Sardesai

Manish, a great article. Thanks for these efforts.

Thankfully in India, market has never been extremely expensive in P/E terms over last 25 years, so generally previous high gets breached in next 5-7 years. However in extreme cases like 1929 US market or 1989 Japan market, it may take a long time to breach previous high. Japan market is down by more than 50% even after more than 25 years!

In general one can expect similar real returns over the long run after making adjustments for inflation as long as markets don’t get into insane territory.

Manish Chauhan

Hi Avinash

Thanks for your sharing your valuable comment on this topic. Please keep sharing your views in future also

Manish

Manish Chauhan

Hi Avinash

Thanks for your sharing your valuable comment on this topic. Please keep sharing your views in future also

ManishHi Avinash

Thanks for your sharing your valuable comment on this topic. Please keep sharing your views in future also

Manish

Ashok

good to see something like this which is relevant at any point in time (this was written in 2009!) and comments still flowing in.

Would it be possible for u Manish to redo the same exercise with latest data – perhaps past 5 years?

Tjhanks for the good work!

Manish Chauhan

Yes, but I will need some time 🙂

tejesh

for the last chart can you also plot the graph for number of times returns were more than inflation.

that would be more useful.

so for example if i invest some money today and at the end of 20 years i am able to say that 100% likely that I will have more than what i invested. It hardly helps because the purchasing power of that money would have gone down substantially.

Manish Chauhan

Good point . Will see if I get time to add that

Kunal

I wrote this in April 2015. It is along the same lines. There is not a single 15 year period where sensex return is negative. https://www.investingfunda.com/a-beautiful-view-sensex-stock-market-returns-over-the-long-term/

Manish Chauhan

Thanks for your comment Kunal

Sai

Hi Mr. Manish, i appreciate the way you provided facts about equity. Thanks for that. Can you please clarify one hidden fact about mutual funds. I calculated average of yearly returns of sample mutual funds- data available in valueresearch. Calculation goes like that you take each year returns of any mutual funds for last 15 years, sum them up and divide sum by 15 years. The average I got so, is far, far higher value than CAGR value published by AMC for those 15 years period. I can understand expense ratio may be a factor, but i do not expect that much reduction in CAGR due to Ex.Ratio only.

Can you please clarify why this is happening and is there any way to get average value of many years invested.

Thank you in advance.

Manish Chauhan

You should not be doing it that way . The way you need to calculate it is using CAGR formula . Expense ration will not have that big impact on retunrs

Parth

Hi Jagoinvestor Team,

Thank you for the amazing info.

Does investing in equity mean that dividends are also considered in final value?

For Ex:- if stocks for X amount are bought and held for Y time period,then does one has to consider the dividends dispensed over Y time period in final value of stock after Y time period?Could you please explain how and what one has to consider?

My question might be naive but I would like to know,also could you please link some articles for further reading.

Thanking you again,

Parth

Manish Chauhan

I think you can skip the dividends , we are only talking about growth of value in the share price when we say equity growth

IndranilSarker

In case, someone wants to incorporate dividends as well, he/ she can refer to NIFTY TR Index (Nifty Total Returns Index) which incorporates reinvestment of dividends for the 50 stocks of NIFTY in NIFTY itself.

However, that actually doesn’t make too much of a difference. The difference between returns from NIFTY & that for NIFTY TR is statistically insignificant (read, not much).

Manish Chauhan

Thanks for that info

DILIP KUMAR

This is quite good article.

I would like to know similar long term(Since Inception) analysis do exist on Mutial Funds? Where do I get it?

Manish Chauhan

YEs you can get it online if you search for it in some mutual funds analysis websites. I am not sure of which one exactly !

Vikas

Dear Manish

Good research.

-Can you compare %age equity return after 5/10/15 years vis – a- vis FD return of 8-10% including income tax applicability for person falling in max 30% tax slab.

– At what point of time or % of return after 5/10/15 years we should consider that the return is good enough to book the profits .

Manish Chauhan

Will have to do a seperate post on this

Anjali

Excellent post , equity is the best asset class when it comes to returns , no other assets class can beat it in terms of returns. But most of the people who enter the stock market are losers. You need have a longer view and control over your emotions to be successful in the share market

Manish Chauhan

Yup .. very correct !

M.S. Gusain

Dear Manish,

The Govt. has recently launched inflation indexed bonds. I find the coupon rate extremely low. Retirees would need current income more than future capital gains.

What is your take on inflation indexed bonds? Are they good for retirees, compared to stay FDs? Regards.

M.S. Gusain

Manish Chauhan

Yes, right now the bonds rate is lower, but soon more bonds are coming and they will surely have better rates. Wait for it

gabriel

What to expect more while investing in equities, is it the dividend is more important or capital appreciation…

Manish Chauhan

What is more important is a personal question , if some one wants a regular side income ,then dividend matters !

Sushanta Choudhury

Although it is said that we should not try to time the market & equity is the best vehicle in the long run but practically it is not so. Return cannot be considered as good even in the long run as every year it varies.

Suppose we withdraw in 20th year by making 10%

we withdraw in 21st year by making 12%

we withdraw in 22nd year by making 9% ..etc

……considering the market volatility.

It is true that we minimise our loss potential of principal amount by staying invested for long run but withdrawl timing is also important unless we are going for SWP in case of MF.

Manish Chauhan

Yes agree on that .. but do you think that if you have 12% return in 20th year .. then you can have 9% in 21st year ? What kind of drop will make that happen ? Any calcualtions ?

shahabuddin

sir please send me average daily return of icici bank, reliance industries,tata consultancy for last four year i am vary thankful to u

Manish Chauhan

You can calculate it by downloading the data from nse website

Prasanna

Thanks for your Reply Manish.

Regarding to CAGR & NAV, lets say there is a Policy which says, “Guarenteed return of Highest NAV during the Period” will something equal to “highest CAGR Return in the Period” i will get?

Sorry, i am confused in both of the terms. Please clarify me.

Manish Chauhan

Prasanna

Ok lets see this example , suppose you invest in A highest NAV product with nav at 10 , and then in next 10 yrs , the NAV went up and down and finally the highest NAV was 19 , then you ask , what was the CAGR return in last 10 yrs , you get it by ((19/10)^(1/10) – 1)*100% . that will give you a % figure . Calculate it ,

Also read this : https://www.jagoinvestor.com/2009/05/video-post-on-basic-formula.html

Prasanna

Sir.. This is what I Exactly Looking for.. Hats off to Master!

Manish Chauhan

Good to know you got what you wanted

Prasanna

Hi Manish,

I am New to Investment & Recently I got to know about your Forum & Really all the articles are Excellent. I have 2 Questions:

1. Lets say I am going with SIP for 30 Years in Mutual Fund. What are the factors i should consider that I wont Loose money, even i start at any Point in Market?

2. What is the difference b/w CAGR & NAV. I need somewhat detailed answer on this.

Manish Chauhan

Prasanna

1. In 30 yrs, I dont think there is much chance of you loosing any money at all . Invest in some good mutual funds and make sure you monitor them in few years

2. CAGR is a forumula , a concept , while NAV is unit price of mutual funds . When a NAV rises from 10 to 12 in 1 yr, its 20% CAGR return

Subbarao Kommuri

“After 11 yrs , There was no instance when equity return was negative , which means that you invest any time in Sensex index and take your money out after 11 yrs , you will not loose . The return would be positive always .”

This analysis would make more sense if you plot probability of getting at least 12% return, instead of 0% return.

Did I made sense?

Manish Chauhan

Subbarao

I agree that 12% returns is not 100% possible , there is chance that it will be low , but there are chances that it will be higher than 12% . So we are taking average .

also this post is more to do with givng the idea of power of compounding and how early investing in equity gives good return over long term

Manish

M.S. Gusain

Dear Manish,

It is not clear to me how money compounds in equities. As I understand, compounding means gains earned in an year being added to the initial investment which becomes the initial investment for the next year on which gains accrue, and so on, year after year, like in an FD. In equities there can be periods of loss. So compounding to me is not the process that works in equities. There may be reasons other than compounding for gains from equities. Kindly correct me if I am wrong, which I believe, I may be, given that I know far less about equities than you do. However, as your study has shown, equities are best investment for all investors over the long term of more than 10 years. Your interest in educating the lay public about money matters is laudable. Keep up the good work. Regards.

M.S. Gusain

Manish Chauhan

there are products where its visible like FD or say BONDs . But in mutual funds and Equities, its not a process, because there is no certainity each year. Its something you have to back-derive . I mean if a stock went from 100 to 1000 in 15 yrs, then you need to find out what was compounding. Its not a guaranteed things .

Manish