Since the Sensex has been up by almost 50% since August 2013, the bull market is beginning to look decidedly unstable. The recent crash may have actually been due. The Stock Market, as you know, is subjected to high volatility in the short term, but not so, over the long term. But the big question is – how long is the “long term” for stock market investments? And what are the chances that you would end up making losses and or get poor returns from equities if you hold your stocks for the long term?
Here are a few findings from a rolling return analysis on Indian equity markets for the last 35 years to justify why long term stock market investments fetch better returns.
# Hold Your Equities For At least 10 Years
In order to nullify your losses from your equity investments, it is highly recommended to hold on to your equity stocks for at least 10 years. Since the survey report found that investors who held their stocks for five years or less, faced a 9% chance of a negative return in the last 35 years. Moreover, investors who timed their investments to the bull market peaks i.e. bought into equities in October – December 2007, March 1997 – April 1998 or November 1993 – April 1994, all made losses on their equity portfolio after holding for a five year time period. Contrastingly, investors who held their equity stocks for 10 years, almost got a guaranteed positive return despite the big market crashes like the ones of 2001 and 2008. Therefore, if you would plan to pitch for a 3 or 5 years investment, you would have fair chances of getting disappointing returns.
# Wait For 10 Years To Get At least 15% CAGR
According to the rolling return analysis of the CNX 500 index since its inception period (1995), the Sensex has delivered less than 15% CAGR nearly half the time (since 1980) on a 5 year basis. Instead, when stretched the holding period for 10 years, the same market has served up 15% plus CAGR about 2/3rd of the times. Therefore, to get a CAGR of 15%, you need to hold on your equity stocks for a time period of at least 10 years.
However, the survey findings show that investors who held small and mid capital investments had evidently got a CAGR of 10-12%. This means, unlike the large capital investments, the small and mid capital investments ensure a fair and more realistic return if held on for a time period of 5 years.
# Improve Your Odds With Active Funds
As per the Rolling Return Analysis on the NAV of the Franklin India Bluechip Fund, the large capital investments which were held for at least 10 years fetched a 15% CAGR, an impressive 92% of the time. However, the investments which were held for 5 years gave investors half and half chance of making a 15% CAGR.
To conclude, if you’re keen to make a 15% plus return from your equity investments, prepare for a 10 year halt and not cash out within 3 or 5 years. And, to maximize the returns in that 10 year window, invest in large capital funds and not small or mid, with much lower risks.