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If these 3 charts can’t convince you about Equity Investment, nothing ever will

If these 3 charts can’t convince you about Equity Investment, nothing ever will

First time when I saw these charts in 2009, I was not able to sleep entire night – if you feel something similar today, I will not be surprised. After my enlightenment day I shared this with few of my friends – everyone was rubbing their eyes too & started doing calculations in excel or calculators. Must share your reaction/observation in the comment section….

Patrick Henry in 1775 said “I know of no way of judging the future but by the past.” I think these 3 charts will make you understand, why we feel equity is the best asset class in long term. (Source: Jermey J. Siegel’s book “Stocks for the Long Run”)

Equity Vs Other asset classes (US)

A

I know you don’t believe what you have seen in above chart but it’s true. Bombay Stock Exchange (BSE) is celebrating 140th anniversary but we have data of only last 35 years. Above chart is based on US data which says $1 invested 210 years back should be $13.48 million (1,34,80,000) & similar investment in any other instrument will not fetch even 1/400th amount. Indians are crazy about Gold they hold approx 62,50,000 Cr worth of gold – in comparison Indian Mutual Fund total equity assets are less that 3,50,000 Cr. In 210 years returns from Gold is 2.1% – $1 investment in Gold turned $86 in 2012. (Gold is down 40% after 2012 – that means if we create this chart today, it will be less that $50)

There is no magic in this – it’s just the basic understanding of how equities generate return & power of compounding.

Above numbers is including inflation – if we talk about real return, Gold will be negative. I am not at all talking about tax advantage in equity investments. THINK

Is story different in other countries?

B

Above chart compares Real Returns(after inflation) – you can clearly see, there is only one country where equity returns were less than double of bond (debt/FD). If we talk about world average – equities generated 3 times returns than bonds.

Even in India situation is not different – read Rs 1 Story

But what about Volatility

Volatility is part of any asset class & definitely it’s higher in equities (in Short Term). Ask yourself – am I investing for only 3-5 years. Do a simple calculation: Investment Horizon = 75 – Age (Now check below chart)

C

You still feel equity is volatile & risky. In book Siegel dissected above data – in 10 years 75% of the times stocks outperformed bonds & in 20 years 90% of the times. Still I am not able to understand why equity is the most neglected asset class.

You missed Real Estate

Added this chart on request of one of the readers. This is Case-Shiller Home Price Index US (adjusted for inflation) – 100 (1890) – 135 (2013) – Real Return less than .25% CAGR. Let’s assume Index still is at 2005 high levels (195) – Real Return .54% CAGR. Let’s assume this data is wrong & it should be 8 times of this data i.e. 2% – bonds generated similar returns in this period, equities generated 6% CAGR (check second graph).

Shiller

Feel free to share your views or ask questions in the comment section.

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  • Manoj July 25, 2015, 1:35 pm

    Hi Hemant,

    I read some where that indians have overall invested 6 lakh 85 thousand crores in mutual funds and China is 3 times ahead i.e around 19-20 lakh crores investment in mutual funds. It suggests that indians have been conservative for many years as compared to the Chinese and inorder to become super power in economy more and more people from india will have to take this equity route and contribute not just for their individual economic growth but also to the growth of the country.

    Reply
    • Vikas Agarwal July 26, 2015, 10:39 am

      Hi Manoj,

      Agree with your last statement, that’s the reason we seem so dependent on FDI for our growth..

      Reply
  • Amol Gupta July 26, 2015, 7:55 am

    What are these charts for India ? What is meant by T-Bills and Bonds in India – FDs ?

    Reply
    • Vikas Agarwal July 26, 2015, 10:42 am

      Dear Amol,
      Bonds should be equivalent to govt of India securities (10 yrs) & t bills like very short term papers.

      Reply
  • Sunil July 26, 2015, 10:15 am

    Yes. But it doesn’t show anything for real estate. I think that’s why it’s called “REAL” estate. It creates more wealth

    Reply
    • Vikas Agarwal July 26, 2015, 11:56 am

      Hi Sunil,
      Thanks for asking this, I have added 4th chart in the post. Real return from real estate are just .25% CAGR, equity generated 6% CAGR in the same period.

      Reply
  • Parth Majmudar July 26, 2015, 10:48 am

    True that equities is the most neglected asset class. There is so much happening in the world when it comes to the economic and financial well being of not only companies, industries and sectors, but also nations as a whole. There is a vicious cycle of economic activity wherein the government, industrialists, entrepreneurs and even consumer tastes play an important role. A normal investor even after understanding the realms of investment tends to panic in such a situation and is wary of risk. Not to forget more than half of the people of the world dont yet understand the economic cycle. And then media aggravates the matter by manifesting news to the public at large. In such a situation, people tend to play as safe as possible and try to be content with the returns they fetch through debt instruments.

    However there is change coming in the mentalities of people. Information now is readily available and the Internet now allows us to even filter out the unwanted information so we read only what we want. More and more people are getting to understand the importance and power of equity investment. More and more people are investing in mutual funds. Off lately, the regulator (SEBI) has started investor education initiatives and forums, wherein public at large can participate and get to know more about equity investment. Change is coming and it is coming slowly and gradually. This itself shows that the volatility and panic in the market is set to lessen. Hopefully during the time a person invests in, he doesn’t lose his patience, discipline and resilience, because the journey of investment shall reap its benefits after many years of turbulence, uncertainty and volatility.

    Reply
    • Vikas Agarwal July 26, 2015, 11:56 am

      Dear Parth,
      Thanks for sharing this, I wish everyone read this. 🙂

      Reply
  • Vinay Agarwal August 2, 2015, 7:48 pm

    The content is very good.

    Reply