Why does staying invested matter in the markets?
What if I told you that if you missed 5 years of being invested in the markets, but were invested for 36 years in the markets from 1979 - 2020, your money just compounded at a CAGR of just 3.15%?
While during the same tenure the market compounded by 14.16% CAGR.
You won't believe this right? It's true.
On 3rd April 1979, the Sensex price was 124.15 (this is by back-calculation, actual trading began only in 1986). On 1st April 2020, after 41 years, the Sensex price closed at 28265.31. This represents an annualized return (CAGR) of 14.16%. Include dividends and the return would be well above 16%. As on 1st Oct 2020, the return is 14.84% before dividends.
The top six annual returns are
267.6% Harsha Mehta Scam (April 1992)
86.3% 2000s bull run (April 2004)
82.3% (Unkown) (April 1989)
78.7% Financial Crisis Recovery (April 2010)
75.1% 2000s bull run (April 2006)
63.6% (April 1994)
Out of these, 82.3%, 63.6%, 86.3% and 78.7% were “recoveries”. The preceding periods saw significant losses. If an investor had run away from the market after these losses, they would have missed these “big returns”.
Remove the gain from the Harshad Mehta scam – 267.6% and the CAGR would drop from 14.16% to 10.6%. This is disillusioning, to say the least. All these gains we dream of by looking at past performance stem largely from a scam.
Remove the top two returns, the 41Y (price) CAGR becomes 8.92%.
Remove the top three and it is 7.34%. Thus three big up moves out of which the biggest was fraudulent account for more than half of the CAGR we compute today and dream about.
Remove the five top moves, the 41Y CAGR is 3.15%
A chart on the top 50 Sensex Price Monthly returns:
What does it imply? :
These results are indeed disturbing but that is the nature of the market (scams included). Big returns either precede or succeed big losses. Those who the big returns “over the long term” will have to stick around to face both the losses and gains.
Overall returns will depend on one or two big up moves. When this occurs, the investor must not only be invested but also be invested big. Post that, they should rebalance their portfolios to lock the gains in safe assets.
*The returns stated above refer to the price returns, which are exclusive of the dividends, which would additionally chip in 2-2.5% returns.
Cheers!
End-Week Wisdom:
"Any book that can be easily summarized isn't worth reading." - Naval Ravikant
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