A recent data point on stock market returns, by Kalpen Parekh, MD and CEO at DSP Mutual Fund, pointed to the reality of equity investing. Something we tend to forget during bull markets.
- 1990 to 1992: 340%
- 1992 to 2003: 0%
- 2003 to 2008: 600%
- 2008 to 2013: 0%
- 2013 to 2023: 300%
- 1990 to 2023: 6970%
The above returns are of the Nifty 50 index. The index was launched in 1996 but historical data was published from 1990. The 2023 returns are as on August 31, 2023.
So what does this tell us?
Investing in stock markets is not a short-term play.
You need to have a perspective of decades.
Holding equity does not guarantee a profitable outcome and involves risk of drawdowns. However, over longer periods, the probability of losing money in equity declines.
Or, as Jeremy Siegel, author and Wharton professor emeritus of finance, said at a conference last year: “We know returns from investing in stocks are remarkably volatile in the short run. But the durability of the equity premium (or the excess return from stocks over a risk-free rate like a Treasury bond) is quite remarkable.
Stock markets can go through long and deep periods of decline.
This is a universal phenomenon.
The Lost Decade of the 2000s refers to when the S&P 500 finished the decade lower than it started (10-year period from December 31, 1999 through December 31, 2009). The dot-com bubble burst pulled the carpet from under the feet of investors. The market did not get back to its August 2000 level until May 2013—almost 12 and a half years after the initial crash.
The Lost Decade of the 1970s was marked by geopolitical disruptions (Yom Kippur War, Iran Revolution, Vietnam War, Energy Crisis, recession).
Investment decisions are rarely validated on the day they are made. It is only over the long run that you stand vindicated.
Always remember that everything is cyclical.
Once you grasp this, you will know how to play the game.
Depressed markets and extreme events can be frightening in the short term. But over the very long run, stock markets have been very generous in rewarding those investors who can get through long periods of decline. If history is any guide, prudent long-term investors who can withstand the risks of equity investing should stay the course and not panic. Eventually, they will be richly compensated. It is not a smooth ride. But the trajectory has been upwards.
The Great Depression, World War II, Russia-Ukraine war, Iraq war, Cuban Missile crisis, Asian Financial Crisis, European Debt crisis, dotcom meltdown, India-Pakistan and India-China stand-offs and border skirmishes at various times, the 9/11 terrorist attacks on the Twin Towers in New York, trade sanctions in the battle between U.S. and China, the pandemic. All these shook the markets. But they recovered, and subsequent bull runs took it to new highs.
During the GFC in 2008, the small-cap index dropped precipitously. It came back to those levels only in 2016. Again, in 2020, there was a frightening decline. Look at the rally today.
The regularity of market declines and subsequent revivals is a reminder that patience is key to investing in equity markets. If you don’t have the patience to hang on, you have already lost the game.
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