What is Long Term Investments? and What to Look for? - Explained with Data Points!

Recently, I got the SENSEX data since inception, and I tweak the data to derive some logical assumptions about the returns in the long term investments. I tried my level best to put it in a simple language so that everyone will easily understand!

The past data may or may not guarantee future returns, I completely agree. But, past data will always tell us where we are heading; the quantum might vary but history repeat itself.

The purpose of this analysis is how one should look at investment in a long term, to really amass wealth. Patience Pays! Since, it is difficult to control emotions, only very few people are making money by investing long term. Others will start bad mouthing, about the fluctuation of the market and eventually will not be part of the entire journey.

In the 34 years of Sensex (Excludes Divided Yield of the Stock around 2% average) only 12 times it has given negative returns as far as one year rolling returns are concerned. The lowest return will be -46.77%, whereas the highest return in one year will be whopping 267%.

If you look out the entire data, it always FELL less than it RISES throughout the period!

In case of 3 years rolling returns, it comes down to 6 times of negative return, the lowest will be -15.21%, whereas the highest will be 81.73%.

In case of 5 years rolling returns, it comes further down to 3 times of negative return, the lowest will be -4.77%, and the highest will be 53.7%.

In case of 7 years, it is 2 times and the lowest will be -1.92%, and the highest will be 42.79%. If we add the dividend yield there will not be any negative returns at all.

In case of 10 years, it is only 1 time and the lowest will be -2.09%, and highest will be 34.69%. If we add the dividend yield there will not be any negative returns at all.

For the period of 12, 15 and 20 years, there will be absolutely no negative return.

More Data to Ponder!

1. Sensex is a diversified large cap, so I have taken a fund which is a large cap (Benchmark Sensex) and it is there for nearly 20 years (Franklin India Blue chip Fund). I have taken a SIP returns for the 3 years in the above table which gives 4.01% CAGR, if  it is in a systematic investment method against the worst Sensex rolling return which is negative (-15.21% return).

2. For 5 year SIP returns 1.73% CAGR, as against -4.77% returns in Sensex.

3. For 7 Year SIP returns 6.09% CAGR, as against -1.41% returns in Sensex.

4. The biggest surprise even to me is for 10 year SIP returns comes to 17.22% CAGR, whereas the Sensex has delivered 3.99% in the same period. It clearly conveys one thing, irrespective of the market situation, (even at lower interest of 3.99% CAGR), long term SIP delivered substantial returns!

5. Indian Equity markets allow the fund managers to create more alpha against the bench mark of the scheme it is intended for.

Biggest Challenges!

The biggest challenge for equity mutual fund is the mindset of the individual. Whatever the data I have shown is Investment Return not an Investor Return (Very few percentage of the investor really understands and reaps the benefits). The effort I am making here is to match investment return to investor return, in the next 10 years or so.

1. It is highly difficult to be not emotional over our investments in the long term. But, will it be worth waiting? The answer is definitely YES. It is in our mindset only. When an individual can wait endlessly (20 years plus) for insurance and property investments, why not for equity mutual fund investments? Which is time tested and proven, not a speculative or low return investments!

2. To my surprise, most of our goals are long term in nature, so we can comfortably set aside some portion of the money for future goals and wait patiently.

3. In case of Govt. employee the biggest plus to pursue the career is Pension. In that, they deduct roughly 10% of their basic pay and save in a debt fund for 30 plus years. Even though it gives less return, because of 30 years compounding, it seems to be a huge sum.

4. Today, most of us are not working in a govt., so they don't have the pension. Yet we can create much bigger pension than what Govt. employee gets, if and only if, we could set aside some portion for a longer duration.

5. All the fixed instrument were okay, for the previous generation; Where they got more interest from their safe investment and less life style needs and don't have the opportunity to diversify also. Today, we have to match our lesser interest rate and ever expanding life style needs. We have no other go than grabbing this opportunity, by investing in these kinds of instruments.

It is after all one life to live, we keep investing in a fixed instrument, believe that it will be safe and without knowing the silent killer (INFLATION!) and bankrupt over a period. The best way to address this issue is to take some well calculated risk and live peacefully. We can leave some estate to our loved ones too.

Opportunities are never lost; somebody has taken over it, those we MISS!

Hope this article helps you to understand better about long term investments than ever before.

p.s. Welcome your Feedback!

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