Using Nifty data from 1999 to 2015, here are three charts that make a strong case for long term equity investing in Indian equities.
1. Longer the holding period, higher the aggregate returns
Holding stocks for under a year is not very lucrative, and holding for five years lets you almost double your money. Note how holding for another five years after that more than triples your money. All hail the power of compounding
2. Longer the holding period, lower the volatility
Chart 1 shows the absolute return which predictably goes up with increasing holding period. However, with increasing holding period, the uncertainty also reduces. Chart 2 shows the range of values as percentage (between 75th and 25th percentile) of the median return for a holding period. Note that the red bars don’t imply negative returns, but returns lower than the median return for that holding period as shown in the 1st chart.
So, there is much more certainty in the 350%+ return over 10 years than in the much lower median return from holding for 1 year. Therefore longer the holding period, less uncertain or volatile, the returns
3. Longer the holding period, higher the probability of gain
Holding stocks for 1 day gives your 54% probability of coming out ahead which is not dissimilar to a coin toss while holding for a year takes it up to 70% (you come out ahead a little less than 3 out of every 4 years). Anything longer than five years almost assures you against losing money (not adjusted for opportunity cost)
These three charts should serve to dispel the myth of equities as a “risky“asset class and the value of holding for the long-term. Here’s the right way to look at risk. So, stop worrying about short-term market fluctuations and start investing regularly.