Many of us believe that Equity is the most risky asset to invest whereas FD, gold, real estates are safe investment. But when we talk about Gold and real estate then we are taking about the long term view whereas in equity people always talk or see them as a short term tool. If you compare the last 10-20 year scenario of returns produced by the equity then you will believe that equity is the safest investment in all the options available. Also they provide you highest return on your investment.
Whenever we talk about the biggest crash of our time i.e., 2008; in that year Sensex produced a return of -52.45%. but if one has invested in the Sensex years back, his return on December 31, 2008 would have been 9.43 per cent, despite the market going into a free fall. Had he invested in the Sensex for 10 years, his return on December 31, 2008 would have been 14.47 per cent compounded annually. So, in the longer run you are safe in the biggest crash also.
Lets have a look on some points below which one should keep in mind while investing:
1.) Long-Time Horizon: As discussed above, equity is for long term investors only. In shorter period their might be volatility but in the longer term share must return to its fundamental position. So, one should select share on the basis of its fundamentals after reviewing them carefully. So that you can have faith on it. Or if you are not good at handling equity directly; you must look for mutual funds, They will really prove to be beneficial for you. People think of cash as being a safer investment for longer time periods; stocks actually are a safer investment for someone investing for maybe 10 or 20 years versus cash or bonds.
2.) High Short-Term Risk Tolerance: Many people decide to invest for the long term period. But they face lot of difficulties at the short term volatility. Normally it happens that when you invest in share market: your shares fall at much faster rate than the index, and at that time it becomes an important part for one to see how comfortable he is with his portfolio and can hold it for long term or not.
Back in 2008, if you were going to panic and sell out your stocks, then an aggressive portfolio isn’t for you. But if you’re an investor who really can stomach these ups and downs, this evidence suggests strongly that holding stocks is a great long-term investment philosophy.
3.) Behavioral Investing: I personally believe it to be the biggest key for the Value Investor. Some people get panic in the sharp fall in index and they sell their position by feeling terrified. For them an equity-heavy portfolio won’t make sense. Look back to how you reacted in 2008, if you had this long-term plan, and you were OK with the market going down 40 per cent and holding on, that’s a good investor for the long haul for stocks. Whereas, someone who panicked and sold out in 2009 would not be a good investor for this kind of aggressive portfolio stance.
4.) Liquidity Purposes: If you have a 20 year time horizon and you are investing for the purpose of getting good return so that you can successfully achieve your future plans such as: child education, child marriage, retirement etc. Then equities may seem a bit safer – all things considered.
If you have something to add, Please post your thoughts in comments. I would love to hear from you.