Myths Around Equity Market

Equity market is often looked at as an instrument with high risk and sophisticated skill requirements. Traditional society setups stick to bank deposits to park their money, even if they yield extremely low returns because they provide a sense of security and a predetermined rate of return. These are the only two factors that are typically taken into account when choosing the best asset to invest in. These conventional debt deposits’ yields are so poor that they don’t even come close to keeping up with inflation. As a result, the purchasing power of bank reserves, with time, keeps on diminishing.

How do know-nothing investors go about investing?

Benchmark indices of the Indian Stock market, in long term, have outperformed the rate of return of bank deposits, or the inflation rate for that matter, with a considerably high margin. Sensex began trading at a base point of 100 in 1979 and is currently trading close to 57000(as of 4th October 2022), growing at a compounded annual growth rate (CAGR) of over 16%. Simply said, if a know-nothing investor needed to multiply his wealth by 570 times, all he had to do was place the money in an index fund and do nothing for the next 40 years or so. And guess what? This 16% CAGR is higher than the returns achieved over the years by many reputable mutual fund houses.

Why would the equities continue to produce returns of over 16 percent?

It is essential to realize that banks often borrow money at a cost of 4–6% and then lend it to businesses at a rate of 10–12%. Therefore, for businesses to continue to be profitable, their returns must be much greater than 12%, which is what the average return of all industries and the equity market will be. Simply because average company returns should be much greater than this 12% threshold figure implies that future returns of equity markets will be in the range of 16–20% or even higher.

Asset allocation

Financial literacy does not mean investing all your hard-earned money in equity markets. But it refers to the wisdom that one must possess to decide what fraction of capital has to be kept in debt deposits and what must be invested in equity or property. Bank accounts are your go-to deposits for short-term objectives, but they have very low returns, whereas investing in stocks helps you achieve long-term objectives.

Volatility in Equity market

The stock market does carry some risk, specifically the risk of volatility, compared to bank deposits. But a long-term investor makes the best use of this volatility by increasing the investing installments in the times when the stock prices are trading at steep discounts. Investments made during slowdowns/recessions are the ones that yield great returns and thus create tremendous wealth.
People often tend to question their investment decisions, the moment the market tends to trade in red. Assets like gold/real estate are volatile too but investors don’t track their valuations minute to minute as they do with equities. Had the prices of real estate been published on some ticker on real-time basis, properties around the world might have dealt with similar sentiments.

How to deal with volatility?
“Steeper the fall, greater the rise,” says legendary investor Mr. Vijay Kedia. Whenever the world has experienced a recession, prices have recovered at an even faster rate. He continues, “One should keep the horizon long and not be in a hurry to make money. The key is to spend time in the market, and not to time the market.”

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