In this article I am analyzing Historical Returns generated by Sensex since its inception and logical conclusion derived on basis of the facts and figures.
In one of the earlier post FinWin recommended investment into Index ETF mentioning that one doesn't need to invest time, follow or track the underlying constituent for performance if a person has long term investment horizon i.e. 10+ years. Also in articles on Financial Independence, I have mentioned about 'Power of Compounding' where calculations are based on 10% CAGR effect over long period of time. Having said that FinWin has recommended investment option as equities to get 10% or more CAGR returns.
The base year for sensex was 1978-79 at base index value of 100 which has now grown to 17000+ in 30.52 years since then growing at 18.36% CAGR .which is quite exceptional returns. The article highlight three key indicators namely 'Probability of Loss' , 'Average returns' and 'Deviation from Average' across different time slices of 1 yr, 3 yrs, 5 yrs, 7 yrs, 12 yrs, 15 yrs, 20 yrs and 30.52 years.
As it is quite evident from the data 'Probability of Loss' in short term is 50% to 9% with 'Average Return' ranging from 18% to 11% and 'Deviation from Average' from 30% to 7.5% points for investment time frame of 1 year to 7 year period. However with time horizon of investment more than 10 year to 30 years you will see that 'Probability of Loss' is NIL with returns averaging from 10% to 20% and deviation from average of around 4.75% to 2.5%.
As it is quite evident from the data 'Probability of Loss' in short term is 50% to 9% with 'Average Return' ranging from 18% to 11% and 'Deviation from Average' from 30% to 7.5% points for investment time frame of 1 year to 7 year period. However with time horizon of investment more than 10 year to 30 years you will see that 'Probability of Loss' is NIL with returns averaging from 10% to 20% and deviation from average of around 4.75% to 2.5%.
Thus based on the facts and figures as presented below the conclusion derived is that investment in Index in short to medium term provides return of 11%-18% CAGR with deviation of around +/-7 to 30 with Probability of capital erosion of around 9%-50% hence proving very volatile with risk to the capital invested. But if a person is invested over long term i.e. 10+ years than 'Probability of Loss' or 'Capital Erosion' is virtually NIL providing a return of 10% - 20% CAGR with average deviation of +/- 2 to 5 points.
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3 comments:
This is excellent data.
Where does one get similar stuff wrt CAGR over various periods of INDIVIDUAL SHARE STOCKs?
Yes, Long term investing has always paid good results.
The return of stocks is definitely high when compared to bonds, though this figure needs to be adjusted for inflation to give a correct picture, particularly if the investment is for a considerably long period of time..
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