How much return can I expect from equity after 15 years of investing?
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
🤔 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.
📉 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
💡Returns
💡Long-term
💡Inflation
💡GDP Growth
💡Mutual Funds
💡Stocks
💡Portfolio Management
💡Fixed Income
💡S&P 500
💡Expectations
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.
Transcripts
hi I'm P from frean Cal in another video
aimed at uh new members of our community
let's talk about returns from Equity
investing over the long term so often I
get um emails or comments from readers
asking how much return can I expect from
uh investing in equity either in mutual
funds or stocks or the long term over 10
years 15 years 20 years and so on and I
often tell the
the answer is I don't know the
honest uh answer without any conflict of
interest is I don't know no one can know
but the uh good part is no one needs to
know I'll come to that so when I say
this when I say that uh one does not
know
um uh how much return they will get
they'll then some of them will respond
no no I I heard somewhere saying that
you will get inflation plus GDP growth
as the return and so on see those are
all estimates and those estimates are
very crude estimates and they may not
actually pan out to be the case when you
start investing and they're they're far
from accurate and they cannot be used
and another set of people would respond
saying if you are telling me that I
don't know how much return I will get
then why should I invest in equity why
should I invest in equity when there is
no guarantee my response uh to that is
um
well you don't get a guarantee in most
things in life uh when you uh join a
college there's no guarantee you will
pass there's no guarantee uh you will
get a good job and when you get a good
job there's no guarantee you will stay
in that good job when you get married
there's no guarantee that you will uh
stay married you have to work uh to you
have to put an effort to make that
marriage work you have to put an effort
to make that uh you know college
education or that job work similarly you
have to put an effort to make your
portfolio work and uh since there are no
guarantees in most things in life why
should you expect guarantees in equity
investing if you want a guarantee and
um put put it in some like ppf or fix a
deposit Etc where the return is known
beforehand then you're guaranteed to
fail and you're guaranteed to not uh
beat inflation over the long term after
paying necessary tax etc etc as
relevant so what does the data tell us
and I will link the research in the um
uh in the description or in the comments
you can take a look at it so the the
research tells us this if you
take uh the S&P 500 and there are like
122 years or 24 years of Market history
it is not wise to take Indian market
history because it's about 45 46 years
there's not much you can do with it and
so it's very young market India is a
very young market so if you take 122 25
years of mar uh Market history and if
you take 15E returns you can see that uh
you can see the data you can I have
shown this before in previous videos you
can the returns are anywhere they can be
extremely positive or negative or they
can be so bad that the xir even can't
calculate the
return but the data tells us that
typically there is a very good chance
that the equity return will beat
inflation
that is what the data tells us the that
doesn't mean it will happen always but
there is a reasonable chance that it
will happen that is more than enough
that reasonable chance is more than
enough for you to uh you know to say
okay I will take that reasonable chance
I will work my portfolio and take it
toward success instead of choosing the
other option of fixed income where you
are uh guaranteed when you know the
return and you're guaranteed of the
return but you're also guaranteed to
fail because that return will not be
enough to uh to overcome inflation if
you have to overcome inflation with
fixed income you have to invest a lot
more a significantly lot more than
you're investing in equity and most
people don't have that money so you're
guaranteed to fail so would you rather
take a path where you have a reasonable
chance of success with proper portfolio
management or would you take a path
where that you are guaranteed of failure
so it's a no-brainer that you have to uh
choose uh uh Equity investing however
there is one very important caveat the
history tells us that Equity has a
reasonable chance of beating inflation
history doesn't tell us
that um Equity has uh Equity almost
always gives you the return you expect
or reasonably uh most of the time it
gives you the return you expect that is
not the two things are very different
see U inflation in the US is 3% 4%
typically of course it can sometimes it
has gone up during the late 70s and so
on inflation has been very high in the
US recently in the last few years also
it spiked up and then it fell down and
so on but typically it has always bet
inflation however if you expect 15% from
Equity 18% from Equity because your fund
gave you that much in the past one year
two year returns and you expect that
kind of performance over the last for
the next 20 years uh or 25 years in
future if you expect then that is silly
uh if you expect 15% 18% and Equity
gives you let's say 11% or 12% Equity
would have still won as an asset class
because it has bet inflation hopefully
in India it won't be more than uh 78%
hopefully uh it has bet Equity has bet
inflation it has done its job but you as
an investor has failed because you
expected more uh a little more than you
should and because of you expected more
you invested less and therefore uh you
have lost all this time and you can't
make up for it so it's possible for
Equity to win and the investor to lose
so you have to expect less just like in
life if you expect less you will be
disappointed less same applies to equity
as well so take a reasonable chance and
don't expect guaranteed returns
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