How much return can I expect from equity after 15 years of investing?

freefincal - Prudent DIY Investing (freefincal)

12 Jul 202406:21

Summary

TLDRIn this video, P from Frean Cal addresses the uncertainty of long-term equity returns, emphasizing that no one can predict exact outcomes. He dispels common myths about guaranteed returns based on inflation and GDP growth, highlighting the importance of effort in investments. Historical data suggests equities have a strong chance of beating inflation, making them a preferable choice over fixed income options. However, P warns against expecting high returns based on short-term performances, advocating for reasonable expectations and diligent portfolio management to avoid disappointment.

Takeaways

😕 Investing in equity over the long term does not guarantee specific returns, and no one can predict the exact outcome.
🤔 Common estimates like 'inflation plus GDP growth' for returns are crude and not reliable for actual investment decisions.
🙅‍♂️ There is no need to know the exact return from equity investment because, like many aspects of life, there are no guarantees.
💼 Effort and management are required to make investments work, similar to other life endeavors such as education and marriage.
🚫 Fixed income investments may offer guaranteed returns but are likely to fail in the long term against inflation.
📊 Historical data from the S&P 500 suggests that equity investments have a reasonable chance of beating inflation over time.
🌐 It's important to consider long-term market history, such as the S&P 500, rather than the relatively young Indian market.
📉 Equity returns can vary widely, with the potential to be extremely positive or negative, and sometimes even uncalculable.
💡 The reasonable chance of equity beating inflation is a compelling reason to invest, despite the lack of guaranteed returns.
🤑 Expecting high returns from equity based on short-term performance is unrealistic and can lead to disappointment.
🧐 It's crucial to manage expectations and understand that equity can win as an asset class while individual investors may not meet their personal return expectations.

Q & A

What is the main topic discussed in the video script?
-The main topic discussed in the video script is the unpredictability of returns from equity investing over the long term and the importance of managing expectations when investing in equities.
Why does the speaker state that no one can know the exact return from equity investing?
-The speaker states that no one can know the exact return from equity investing because it is influenced by numerous variables and market conditions that are inherently unpredictable.
What does the speaker suggest as an alternative to relying on crude estimates for equity returns?
-The speaker suggests that instead of relying on crude estimates, investors should understand that there are no guarantees in investing and focus on the historical tendency of equities to beat inflation as a reasonable chance of success.
Why does the speaker argue that guarantees in most aspects of life are not to be expected?
-The speaker argues that guarantees are not to be expected in most aspects of life because success often requires effort and management, similar to how one must work to make a marriage or a job successful.
What historical data does the speaker refer to when discussing the performance of equities?
-The speaker refers to the historical data of the S&P 500, which has over 122 years of market history, to illustrate the performance of equities over time.
How does the speaker differentiate between the historical performance of the US market and the Indian market?
-The speaker differentiates by stating that the US market has a longer history of over 122 years, while the Indian market is much younger with only about 45-46 years of history.
What is the speaker's view on fixed income investments compared to equity investments?
-The speaker's view is that fixed income investments may offer known returns but are likely to fail in beating inflation over the long term, whereas equities offer a reasonable chance of success with proper portfolio management.
What is the caveat the speaker mentions regarding the historical tendency of equities to beat inflation?
-The caveat is that while history shows equities have a reasonable chance of beating inflation, it does not guarantee that equities will always meet the specific return expectations of an investor.
Why does the speaker advise against expecting high returns like 15% or 18% from equities based on short-term performance?
-The speaker advises against this because equities may still win as an asset class by beating inflation, but an investor who expects such high returns may fail if they invest less or are disappointed, thus losing out in the long run.
What is the final piece of advice the speaker gives to investors regarding their expectations from equity investments?
-The final piece of advice is to expect less and manage one's portfolio with a reasonable chance of success, rather than expecting guaranteed high returns, to avoid disappointment and potential loss.

Outlines

00:00

🤔 The Uncertainty of Long-Term Equity Returns

In this paragraph, P from Frean Cal addresses the common question about the expected returns from long-term equity investing, particularly for new community members. P emphasizes that no one can predict the exact returns from equity investments over extended periods like 10, 15, or 20 years. He dismisses crude estimates like 'inflation plus GDP growth' as inaccurate and highlights that uncertainty is a part of life, including in education, employment, and marriage. P suggests that while there are no guarantees in equity investing, historical data indicates a reasonable chance that equity returns will beat inflation, which should be enough to encourage investment. He also warns against expecting guaranteed returns and choosing fixed-income investments that are likely to fail in the long term due to their inability to outpace inflation.

05:02

📉 Unrealistic Expectations and the Risk of Investing

The second paragraph continues the discussion on equity investing, focusing on the dangers of setting unrealistic expectations for returns. P cautions against expecting high returns like 15% or 18% from equity based on short-term performance, as this could lead to disappointment and poor investment decisions. He points out that even if equity returns are lower than expected but still beat inflation, the investor could still lose if their expectations were too high. P advises investors to manage their expectations, aiming for reasonable chances of success rather than guaranteed outcomes, and to avoid the pitfall of expecting too much from their investments.

Mindmap

Keywords

💡Equity

Equity in the context of the video refers to ownership interests in a company through the purchase of stocks or shares. It is a core concept as the video discusses the potential returns on investing in equity over the long term. The speaker emphasizes that while no one can predict exact returns, historically, equity has a reasonable chance of beating inflation, which is a key point in the video's message about the benefits of equity investing.

💡Returns

Returns in this video script are the profits or gains an investor can expect from their investments. The video addresses the common question of how much return one can expect from equity investments, highlighting that while specific returns cannot be known, the historical data suggests that equity investments tend to offer better returns than inflation over the long term.

💡Long-term

The term 'long-term' is used to describe the extended period over which investments are held. The video emphasizes the importance of considering long-term perspectives when investing in equity, as it is over these extended periods that equity investments have historically shown the potential to outperform other forms of investment.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. In the video, inflation is used as a benchmark to measure the success of equity investments, with the speaker suggesting that equity has historically provided returns that beat inflation, making it a preferable investment choice.

💡GDP Growth

Gross Domestic Product (GDP) growth is the rate at which a country's economy is expanding. The script mentions that some people believe that returns from equity investments can be estimated as 'inflation plus GDP growth.' However, the speaker refutes this as a crude estimate, suggesting that such predictions are not accurate or reliable.

💡Mutual Funds

Mutual funds are a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. The video script uses mutual funds as an example of one of the many forms of equity investments that individuals might consider, emphasizing that the returns from these funds, like all equity investments, cannot be predicted with certainty.

💡Stocks

Stocks, also known as shares, represent ownership stakes in a company. The video discusses investing in stocks as a form of equity investment, where investors can potentially earn returns based on the company's performance and market conditions. The speaker uses stocks to illustrate the concept of equity investing and its potential for long-term gains.

💡Portfolio Management

Portfolio management refers to the process of overseeing and making decisions about investments. The video script suggests that to succeed in equity investing, one must actively manage their portfolio, putting in effort similar to other aspects of life that do not come with guarantees.

💡Fixed Income

Fixed income investments are those that provide a predetermined return, such as bonds or fixed deposits. The speaker contrasts fixed income with equity investments, stating that while fixed income offers known returns, it often fails to beat inflation over the long term, making it a less desirable choice for investors seeking growth.

💡S&P 500

The S&P 500 is a stock market index that measures the performance of 500 large companies listed on stock exchanges in the United States. The video uses the S&P 500 as an example to illustrate historical market performance, indicating that over a significant period, equity investments have shown a tendency to provide returns that outpace inflation.

💡Expectations

Expectations in the video refer to the预先设定的投资回报率。 The speaker warns against setting unrealistic expectations for equity investments, as this can lead to disappointment and poor investment decisions. The video encourages viewers to have reasonable expectations and to understand that while equity has historically beaten inflation, it does not guarantee specific high returns.

Highlights

The speaker emphasizes that it's impossible to predict exact returns from long-term equity investments.

Equity returns are compared to life's uncertainties, where effort and no guarantees are involved.

Investing in equity is justified by the lack of guarantees in most aspects of life, including education and employment.

The speaker discourages seeking guaranteed returns, suggesting fixed deposits as an example of a guaranteed failure to beat inflation.

Data from the S&P 500 shows that equity has a reasonable chance of beating inflation over the long term.

The speaker notes the importance of not relying on short-term performance to predict long-term equity returns.

Investors are cautioned against expecting high returns based on past performance, as it may lead to disappointment.

The transcript highlights the difference between historical data suggesting equity can beat inflation and expecting specific high returns.

Investors are advised to manage their portfolios actively rather than relying on fixed income investments with known, low returns.

The speaker explains that while equity has historically beaten inflation, it does not guarantee meeting individual return expectations.

The importance of having a realistic expectation when investing in equity is stressed to avoid potential disappointment.

The transcript points out that it's crucial not to expect guaranteed returns from equity investments, similar to other life endeavors.

Investors are reminded that while equity as an asset class may win, individual investors can still lose if their expectations are too high.

The speaker suggests that taking a reasonable chance with equity investing is preferable to the guaranteed failure of fixed income investments.

The transcript concludes by reiterating the need for a balanced approach to equity investing with an understanding of its historical performance.