Khota Paisa

Facts : Historical Returns From SENSEX

Posted in General by khotapaisa on June 10, 2009

Of all the readings I have done on the internet and all the personal finance books(not many) I have read, there is one common message in all – “Equity is for a long time horizon(5-10 years or more) and it beats any other investment”. I, myself, am a strong believer in long term equity return. Infact my thumb rule is that any investment for longer than 10 years is for equity and equity alone. Just today, I downloaded historic SENSEX data starting 1991. During analysis of this data, what I found has forced me to re-evaluate(not reverse) my take on equity investment. Have a look at the table below. It shows 5 & 10 years compund annual return from SENSEX.

sensex returns

It shows that over any 10 years period, the SENSEX return has varied from 2.59% to 18.69%. The same return for a 5 year period has given negative reurn more than once. What is not shown in the table here is 15 years return which varied somewhere from 7% to 14-18%(don’t exactly remember it).

What is worrying me is that anyone investing for 10-15 years time frame (typically child education, marriage etc as goals) is clearly (and maybe significantly) at risk of getting sub 10% returns. Remember that everytime the financial advisors/experts plan your goal, they assume the equity returns to be ~15% over the same time frame. Even for my calculations, I use 12%  returns from equity.

For me, Time to think about it all over again. What about you? Have you already factored it?

Note: As our reader Amit pointed correctly, the calculation doesn’t takae into account the dividend. But I guess it won’t change the volatility of SENSEX by much.


4 Responses

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  1. AmitKher said, on August 10, 2009 at 1:26 pm

    You have not considered dividends.

    • khotapaisa said, on August 10, 2009 at 3:58 pm

      No. As mentioned, the data is the sensex historical data. Even if you take into accoutn the dividend(an exercise in itself), the volatility will not change much. So, the table gives a fair idea of risk/volatility in equity over long term. I guess the historical dividend yield for SENSEX is not more than 2%.

  2. AmitKher said, on August 10, 2009 at 5:50 pm

    It gives a fair idea of risk/volatility. But the topic of the post was about returns, volatility was not even mentioned. And it gives wrong idea about returns. Assume 1% uniform dividend returns, 5 year dividend return becomes 5.1%. So all the negative 5 year periods become significantly positive by this simple (but inaccurate) calculation.

    I agree with you that real returns are difficult to calculate. But that doesn’t mean ignore dividends. Especially when it is likely to turn negative returns into positive.

    • khotapaisa said, on August 10, 2009 at 6:22 pm

      As far as I see, volatility is a measure of risk. As I said, you rightly pointed about the dividend(i will add a note on the blog about it), but my back of envelope calculations show that the spread of long-term return(deviation) from SENSEX won’t change significantly even after factoring in the dividend. I will anyway add a note about this.

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