The case for long term equity investing in three charts

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

The Calm Investor | Long term equity investing India

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

The Calm Investor | Long term equity investing India

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

The Calm Investor | Long term equity investing India

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.

 

5 thoughts on “The case for long term equity investing in three charts

  • June 1, 2015 at 10:06 pm
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    None needed!

  • June 1, 2015 at 10:10 pm
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    This is really good stuff. Thanks for putting this out.

  • June 2, 2015 at 9:21 am
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    Good to know Prameet 🙂 But doesn’t hurt to reinforce the message.

  • June 21, 2015 at 2:14 pm
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    Nice illustrations .. Appreciate for your time to prepare these charts. Eye opening for illiterate or average investors.

  • June 22, 2015 at 8:42 am
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    Thanks for the kind feedback Siva!

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