SENSEX risk and reward.

btt-sensex

If someone is rich (filthy rich), chances are that all of their riches came from Equity Investing. Either they own one or many businesses or have invested in some companies and have stayed on with it. Generally people shy away from Equity investing due to the fear of loss to their capital. This fear is due to either their own experience or through other people’s sharing of losing experience in the markets.

It is true that a lot of retail investors lose money is stocks; the reason is not the markets. It is because of the approach. Most of the times, it is because of the fear of losing, even before approaching the asset, that attracts the losses. Many a times a person does not know the reason for investing in a stock. Just because someone close to them have told them about the stock, they go ahead and park their hard earned money and when the stock goes down, which invariably happens, the reasoning will be, “it has to happen, when I have invested, how can it go up. Always it happens.”

Holding gets exited after suffering a lot of pain due to losses. Then, they shy away from the markets when it goes up again. The same fear makes them wait for more and more confirmation. Again when media begins to talk and they begin to hear from their friends and near ones about their big gains through some stocks. They venture again, when there is news about big gains already made, left over gains are lesser and signs of weakness have already set it. Which, most of the times is not known to the fearing investor. After getting in the markets begin to slide, again the story repeats.

The other reason for losing is “GREED”, just because there is a great opportunity to make money in the markets, people want to take high risk & get all that is possible from it. One transaction would have given a good profit, while they would have made only small money. The experience of profit will make them take the decision to invest all the money they have and sometimes even borrowed money. The motive is to make big or very big gains in few transactions. After investing, even a small negative move will shake their belief, not because the stock they invested lost heavily, it is because their exposure is so heavy. Once the mind balance gets lost, everything that follows will be against their wishes.

In reality, stock markets are, one more asset class like Gold, FD, Real estate etc., it has the advantage of giving the highest returns, while not always in short periods. Stay invested for a longer period, the returns will for sure be very high. Due to volatility in the price moves there is risk in this asset, for that matter any asset has a risk quotient in it. Only that it is a little more in Stocks and that is the reason the returns are also high.

Some data on what is the risk in the markets and how it can be taken at our advantage:

In shorter durations the risk of loss can be as high as 50%, while at the same time if the period of being invested increases, the risk goes in the opposite side, it gets reduced.

The chart below shows that if we stayed invested for 7 years, the chances of our capital getting negative is zero. That is, if a person invests 10 lakhs in the SENSEX stocks and stays invested for 7 years, the chances of his 10 lakhs getting negative is zero.

7th Year Zero risk

Similarly, staying invested for 10 years and above gives an average return of 12% per annum. There is an 80% chance of achieving this.

10 year rolling

SENSEX goes through changes once in 6 months, most of the times 2 of the index stocks get replaced with a new stock. If such a low turnaround index can give 12% without any effort, a little extra effort to churn and manage the portfolio, the chances of better returns is higher. Another advantage with Equity investing is that, long term capital gains are not taxed.

Equity is the only asset which has the highest return possibility along with liquidity, take advantage of this asset class. Any individuals investment portfolio should contain some percentage of Equity exposure in it, so that the overall returns can beat inflation.

About Author

Ramesh Sigamani

Ramesh Sigamani

With over 3 decades of experience in capital market investments, Ramesh Sigamani is a trusted Financial Planner par excellence. He works personally with individuals and corporates to build a strong investment portfolio that stands firm against market volatilities and delivers time & time again.

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