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Equity Investing – The Worst Case Scenario, 10 Year Horizon Basis

10 year CAGR for the period 1 April 2010 – 31 March 2020: 6.19%.

Covid 19 made equity market tumble and we had to contend with a lowly equity market returns. We can safely say 10 years is long enough investment horizon. Investment return of this quantum will easily qualify as worst case scenario. And it was.

If we consider only point to point figure.

Here’s what unique to listed equity investing: it is NOT like buying property where you lock in “one” price at a point in time. Then why look at worst case (or even best or average case) on point to point basis?

My opinion – to get an idea of real worst case scenario, looking at data on 3 year moving average basis makes better sense.

Let’s see what numbers say. Point to point returns of 10 year period ending:

-          31 March 2018:                                10.11%

-          31 March 2019:                                16.78%

-          31 March 2020:                                6.19%

Three 10 year period moving average:    11.02%

Now it doesn’t look that bad. Let’s call this “Scenario 1”

Checking out few more scenarios….

Scenario 2: Point to point returns of 10 year period ending:

-          31 march 2020:                                6.19%

-          31 March 2021:                                11.56%

-          31 March 2022:                                14.69%

Three 10 year period moving average:     10.81%

Scenario 3: Point to point returns of 10 year period ending:

-          31 march 2019:                                16.78%

-          31 March 2020:                                6.19%

-          31 March 2021:                                11.56%

Three 10 year period moving average:     11.51%

As these are index returns, even if we knock of 1% as index tracking error, we still end up quite close to 10% CAGR in all three scenarios. Looks like worst case scenario is not that bad once you look at it considering how most of us invest practically in listed equity markets.

Don’t forget, when I talk about listed equity investing, I am referring to indexing only. The returns mentioned are Nifty 500 TRI basis. 

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