What You May Expect From The Sensex
If you said “copious riches”, I’ve news for you. I’m afraid it isn’t great news.
I started investing in Indian mutual funds at the sprightly, young age of 41. It’s one thing to learn the markets through a rich tapestry of personal investing mistakes, but that kind of thing may have been somewhat difficult given my late start.
I needed to figure out what to expect. And bake that into my goal planning. So, if the past is any guidance for the future, I’ll stand a good chance of meeting my goals.
The twenty-year data set
From 1991 to 2020, I took the Sensex close for each year. This isn’t very representative as the stock market operates on a daily basis, but in any case, that’s the data I set out to analyze.
You’ll notice a few things:
There’s a lot of up and down in each of the three annualised growth rate lines. But with increasing time, the highest highs and the lowest lows come closer. For example, the 3-year annualised growth line, in dotted grey, seems to be on a roller coaster while the 10-year line, in solid yellow, is about to sleep at the wheel while the car cruises.
But they all return an average of 11% or thereabouts.
Who wants to be average?
Nobody.
The problem with average is eating bacon, lettuce and tomato in some combination & expecting to taste a BLT sandwich. A better question to ask may be what will a given, specific investment in the Sensex return in 3, 5, or 10 years.
If you asked that question, you’ll have to compute a measure called standard deviation. If you did that, here’s what it looks like. In English:
For 3-year annualised returns, there’s a 70% chance that a specific investment will fetch between -1.8% to 25%. For 5-year returns, this is 1% to 21%, & for 10-year returns, 6.5% to 16.5%.
By investing in the Sensex for at least 5 years, you’ve given yourself a first-class chance of not losing money. By investing for 10 years, you’re virtually sure to beat fixed deposits.
Can you just give me a number?
Yes, I can.
The way to do this is calculating expectations. And yes, that’s a mathematical measure.
In our case, we’ll compute the probability & impact of negative and positive returns, for each of the three lines, & add it up to calculate a total returns expectation.
Expected 3-year return: 12%
Expected 5-year return: 11.44%
Expected 10-year return: 11.44%
In stark contrast to owning stocks, the Sensex, which is a weighted basket of 30 stocks on Bombay Stock Exchange, confers no incremental advantage to investors beyond 5 years.
But you don’t have to choose stocks. You don’t have to time the market. Hold for 5 years, & you’ve virtually guaranteed yourself 11.5% annualised returns.
And that leads us back to ourselves. Is a consistent 11.5% enough for each one of us individually is something we’ll each have to answer looking within.
