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