While equities (including mutual funds) have historically given good returns in a long time horizon. they come with a risk. No one can guarantee if your’ll make good amount of money or lose money in stocks in long run (though I believe that probability of making money is much more. However, while there is a risk associated with investing in equities, there is a risk associated with not investing in equities also.
What are the risks in not investing in equities?
The major risk in not investing in equities is your investments not being able to beat inflation in long run.
While, investment like bank deposits (or debt/ bonds) offer a steady rate of returns in long run (even they are not completely risk-proof & there can be defaults), they may not help you beat inflation in long run.
- In most of the European countries or USA, bank returns are typically less than rate of inflation.
- In India the bank deposits currently give little higher than inflation (few instruments give higher returns & tax benefits also – e.g. PPF, PF contribution, NSC etc.)
Real estate investments may or may not be above to generate inflation adjusted returns. In recent times, they haven’t in most of the markets. In some places, owing to local factors they may be!
And the inflation we are talking about in above is the inflation number which government agencies release (based upon basic needs) and not necessarily the lifestyle inflation. And you never know when this can change (considering that most of the “developed” economies have lower interest rate.
On the other hand,
Over long run (past 25 years or so), BSE Sensex (India) has given close to 10 % CAGR. & Dow Jones (USA) has given close to 8% CAGR. (not considering dividends)
In long run, equities may or may not be able to give good returns.
However, as a good chunk of us expect, it should be able to. And in order to give yourself a good chance to your investments to beat inflation, equities seem to be the best bet as of now. With a growing economy, there is a good likelihood of this happening … Hopefully!
Eventually you need to align your investments with your goals. An ideal financial plan consists of capital protection as well as capital growth.
But how much weight do you give to capital protection and how much to capital growth? – It depends on multitude of factors – Your financial goals, your risk appetite, your optimism, your pragmatism and so on!