“Equity works best for the long term” – you have probably heard this said enough. We have also said this on our blog that equity is for 7 years or more. But you might be wondering why the heck does everyone say equity is for the long term? But, market movements are tracked by the media on a daily basis.
So what gives?
Equity is like your career, you can’t judge where you will be in 20 years based on just the first year of your job. You have appraisals based on annual performance but one good appraisal won’t make you the CEO and neither would a single bad appraisal make you the worst employee who ever held a job. Equity as a vehicle for your money is something like that.
Equity is all about the future
Equity or shares of a company are quite literally ownership of a company. For example, if you had the option to “own” a successful company which generates millions of dollars in profits, wouldn’t you want to?
Good companies which increase your wealth take time to grow and sustain their success
Companies that are overnight successes are rare. Most good companies which have grown their shareholder’s wealth AND maintained it have done it over a long period of time.
Consider your own career, most of your success will be created over a period of years and not months. How you are perceived is a sum total of your assignments. If more of your assignments are done well than poorly, your career will grow. Your managers will even be willing to overlook mistakes and some failures.
Similarly, the share price of a company grows over years. What happens in months is more about what investors perceive in the short term which is why like the emotions of your manager, the stock market has a multitude of ups and downs in a year.
The numbers and facts prove it
The Indian equity market has delivered, a compounded average return of approx 16% over its history (or rather the history of the oldest benchmark - the Sensex).
Looking at the BSE Sensex data for the last 33 years, the likelihood of you achieving a return of 15%, irrespective of when you invested, increases with time. It is only 50/50 in 1-2 years, increases to 2/3rd in 7 years and even more to 7/10 in 15 years.
A more reasonable (but still handsomely inflation beating) return of 12% is even more likely - three out of four cases, over 7 years or longer
At the same time, the likelihood of low return reduces with time. For example, the possibility that you will get a return less than FD is high at 36% in 1 year but drops to 21% in 7 years and even lower to 18% in 15 years.
Basically the longer you hold on, the greater the chance of making rather than losing money.
Inflation beating returns = Wealth
Equity investing grows your money faster than inflation shrinks it - a net growth that creates wealth. This is why you can start small but still end up with a lot more money than you would get with any other option. The catch, if you want to call it that, is that it takes time.
So give your equity investments time and they will give you back wealth.
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