Stocks Are Not Always The Best Things Ever

A common myth in financial advisory circles is that in the long run,stocks outperform equity,so a person should have equity in their portfolio.

So what would your fate have been if you had no equity in your portfolio?Take a look at the graph below.It assumes you invested Rs 5000 in an FD or in the SENSEX in 1992.

Sensex vs FD returns

Now you know how  much you might have had 20 yrs from then either way.The figures will change,if you consider different start and finish years.But being certain that your capital is safe,that you are assured of some positive returns at least and being able to predict how much you might have  at the end have some value in themselves.and in these years at least you might not have done too badly if you kept off the stock markets.

But if you can pick stocks,there is nothing like it,Individual stocks could have multiplied to lacs of rupees.You will hear these stories from some of the front benchers in various AGMs. And interestingly,if you had invested in UTI MasterShare,India’s oldest diversified equity mutual fund,you might have seen about a two lacs. So a SIP in a middling diversified equity mutual fund is a good compromise.But mind an index fund wouldn’t have helped you so.As we don’t have too many mutual funds in India with such a long history,its hard to say if the category average of diversified equity funds might have come down if there were more data points.Also in case of equity  you will never be able to predict in advance what your holdings worth will be at some time in future,

Stocks are good in their own way if you wish to build wealth.But don’t be pressured into investing in them if you haven’t financially secured all your life goals.

About Keerthika Singaravel

2 Responses to Stocks Are Not Always The Best Things Ever

  1. Stocks will definitely be more volatile over the short term, but hopefully long term they will be good investments and outpace inflation. I’m more familiar with the US equities markets, and our anemic bond market. Bonds barely outpace inflation (though that is starting to change as rates rise), and equities have dividend yields often times as high as bonds.

    • Justin
      FDs are like CDs in the US.They are non-tradable, unlike a lot of bonds. With higher inflation,in India banks are forced to offer higher interest rates to attract deposits.Or people round here tend to buy gold/silver or invest in land.
      Stocks are something of a novelty in India.The British introduced the concept of the joint stock company in India,and a few Indians set up companies about a century ago.Stocks were pretty closely held and there was a small stock broking community to serve their needs.Only in the 80’s did India’s middle class take to shares as they started investing in Dhirubhai’s Reliance Industries.
      Even today less than 5% of the population owns stocks.And many of them indirectly via insurance plans,pension plans and mutual funds.Awareness about stock markets and stocks is low.There is very little quality analysis available to the general public and very little effort spent on studying equities.The equity markets are nowhere as well regulated as the American markets and we have had our share of massive scams.
      In the last decade,since the stock markets were opened up to international investors,there has been a great deal of liquidity in the local markets and for a while all stock prices rose .The rising prices,drew more people into the market and into leveraged trading.The financial troubles in the West led to the outflow of money and stock market crashes and the attendant pain.
      A lot of people round here are drawn to stocks to make a quick buck.They invest on tips.And often find that they are out of capital.Our mutual funds have been great at marketing and poor at asset management.Index funds have not really worked as the index constituents are routinely changed and when mutual funds have to exit such stocks,they do so at a loss.
      That said,select stocks have been good.They have made billionaires of ordinary investors.You can read about Rakesh Jhunjhunwala here:Link.Hence my advice to Investors in Indian equities.Caveat Emptor!Buy if you know what you are doing.Buy when you have already invested in safer assets to provide for basic life and retirement goals.Then by all means,explore stocks.If you do well,you’ll be wealthier.If you lose,you won’t have jeopardized your family’s future.

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