Top

Is equity all that risky?

With a very long time horizon, stocks actually may be the least-risky asset of all.

In our last article, we wrote about shortfall risk and why investors must invest in equity if they need to meet their long-term goals. We continue in the similar vein.

It’s a common belief that equities are the high-risk portion of investors’ portfolios. In fact, with a very long time horizon, equities actually may be the least-risky asset of all. Equity, over the long term, actually gives the benefit of increased returns without upping the risk taken.

For instance, the Sensex in 2008 had a 1-year return of -52.45%. An investor who would have invested a year ago (at the peak of the bull run) would have seen his investment slaughtered. Had that very same investor invested in the Sensex 5 years prior, his return on December 31, 2008 would have been 9.43%, 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% compounded annually.

Observations

    • For individuals with a long-time horizon, equities may be the least-risky asset of all.

      People think about equities as being volatile investments, because they are. What we found was that the longer you hold equities, the safer they become. People think of cash as being a safer investment for longer time periods; stocks actually were a safer investment for someone investing for maybe 10 or 20 years versus cash or bonds.

      So if you're someone with a very long time horizon, equities actually may be the least-risky asset of all, even though it appears kind of counterintuitive.

    • Investors with a sufficiently long time horizon and a pretty high short-term risk tolerance could be all equity and generate a better return than a blended portfolio.

      This really speaks to the idea that the more time you have to invest, the more aggressive you can be. But an important part of that is how comfortable you are holding that portfolio for a long time horizon.

      Back in 2008, if you were going to panic and sell out of equities, 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 equities is a great long-term investment philosophy.

    • The behavioral piece is the key.

      If you're someone who thinks you might capitulate at the bottom, then an equity-heavy portfolio won't make sense for you. 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% and holding on, that's a good investor for the long haul for stocks. Someone who panicked and sold out in 2009 would not be a good investor for this kind of aggressive portfolio stance.

    • People in drawdown mode absolutely need to have some investments set aside that they can use for liquidity purposes.

      Throughout someone's lifecycle, stocks can really work. Even for some investors who are older, in retirement for example, and have a lot of guaranteed pension income. If you take that 20-year plus picture of retirement, equities may seem a bit safer all things considered.

    • Data Source: Morningstar

      The example given in the document are for illustration purpose only, it does not represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s).

An investor education initiative from Axis Mutual Fund

Goals shown are for illustration purpose only and there is no assurance that the goals represented may be achieved.

Statutory Details:Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd.Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Ltd. is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Something went wrong Please try again!