The burden of long-term returns

Why the tough journey of sticking with the Sensex takes patience and courage

While the Bombay Stock Exchange is more than a hundred years old, trading data for the Sensex is available only since 1979. Therefore, till the end of last year, we have only 35 years’ worth of Sensex data. This isn’t a very long period to gauge long-term trends of equity returns in India.  In comparison, Western markets have hundreds of years of index data that are used to analyze trends in returns of asset classes. (See Triumph of the Optimists: 101 years of Global Investment Returns). To complicate things further, the quality of Sensex data in the early years is suspect as noted by, Debashis Basu.

Still, the Sensex (or since the 90s – the Nifty) is the only benchmark we have of gauging the power of equities as a savings investment for retail investors. And the story peddled by everyone – from investment gurus to mutual funds to business channels – is the same: equities beat inflation over the long-term. This message is true. From 1979 to 2014, the Sensex has risen at a compound annualized growth rate (CAGR) of 16.8% - which is more than the average 8% CPI inflation during this period. 

And yet, focusing on point-to-point return is simplistic at best and ignorant at worst, because these returns average out good and bad periods. There have been periods when the Sensex was a dud. The two worst periods were 1993 to 2002 and more recently from 2007 to 2013. Imagine zero returns for seven to ten year periods. They are enough to disillusion you from equities forever. And this is when you need a bigger picture. 

Rolling returns paint a different story. Rolling returns also use CAGR but are used for a specific duration over a period of time. 10year, 15year and 20year rolling returns since 1979 compare the CAGR for every 10/15/20years (1979 to 1989/1994/1999 so on and so forth ending in 2014). The results are shown in the chart:




There are two key takeaways: a) you’ve never lost money in the Sensex for a 10 to 20yr holding period. Your worst return was 3% in the vicious bear market of 1992 to 2002 and b) 10yr rolling returns have beaten 15yr and 20yr rolling returns by a small margin of 2%. 

Even more interesting is the fact for the period ended 2014, 10/15/20yr rolling returns are running below their long-term averages. If you believe in mean reversion, then this alone is a strong case for long term returns to start picking up for the next 10/15/20year periods. In fact, 20yr rolling returns for the Sensex for the past four years have been the worst since 1999. 

But before you sign up for an SIP, you need to accept a few things: 

a) don’t expect fixed-income type returns from equity. 16.8% CAGR for 35years is not the same as 16.8% every year for 35years. Stick to a Fixed Deposit if you want fixed return.  

  b) understand the implications of long-term investing. Sure, you’ve never lost money over any 10 to 20 year period in the Sensex. But there have been terrible periods of pathetic, cringe worthy returns. 

It’s easy to say “I can forget about my money for the long-term” but believe me, when your friend is thumping his chest over how – for example – his real estate investment is up 10x in 10years (which is 26% CAGR) – you will get carried away because equities just didn’t match up in the past 10years (15% CAGR for Sensex). 

Thick skin, strong stomach and a big reservoir of patience is what it takes to invest in equities. Jump in only if you think you have it in you. Anupam Gupta is a Chartered Accountant and has worked in Institutional Equity Research since 2000, first as an analyst and now as a consultant.

He contributes to the Business Standard platform, Punditry through his blog, Beyond Markets on markets & the economic horizons. He tweets as @b50