Long-Term Investing 101: The Best Options for Building Your Wealth

A couple of days back, I came across an investor who was highly diversified and had several holdings across Real Estate, FD, Mutual Funds & Stocks. This got me thinking that most investors who’ve been in the market since the early 2000s have invested across Real Estate and FDs at least once in their lifetime.

Understandably, they were in vogue at the time. Indian Commercial Real Estate was just coming out of the global financial crisis & FDs being the deep-rooted “Indian Savings of choice”, were the safe haven to go to in times of volatility.

Let’s look at the Data Story.

Given the investment options available in the market, it can get quite tough to decide where to put your money. To make it easier, let's compare some of the most commonly adopted market products like gold, equity, real estate, and fixed deposits (FDs) and see which ones have historically generated the highest returns.

Gold

Often considered a safe haven asset that investors turn to during times of economic uncertainty or inflation. This is because it tends to have an inverse relationship with inflation, making it a good hedge against inflation and a diversification option for investors' portfolios.

Over the past 20 years (2000-2022), gold has generated an average annual return of around 13.37%. This return has been higher compared to other traditional investment options like real estate and fixed deposits (FDs), but lower than average return on equity.

Equity

Equity or stocks, on the other hand, have historically provided higher returns than other types of investments. Over the past decade, the average annual return on equity has been around 16%, which is significantly higher than the average return of other investment options.

Real Estate

Real estate investments can provide significant returns if done correctly, but they can also be more complicated than other types of investments, due to the lack of liquidity and the need for expertise in finding optimal investment opportunities. Over the past ten years, the average annual return on real estate has been around 12.08%.

Fixed Deposit

Fixed deposits are considered a safe investment option as they provide a fixed rate of return over a specified period. However, they tend to provide lower returns than other types of investments, especially over the long term. Over the past decade, the average annual return on FDs has been around 6-7%

*Note: Returns are not inflation adjusted

How did this journey look like?

Without a doubt, it’s clear that Equities are the way to go when you’re looking for creating sustainable Long term investment solutions. While the Sensex regarded as the pulse of the domestic stock markets in India, let’s take a look at the highs and lows of the Inflation-Adjusted Returns for all the asset classes over the last 30 years.

• The largest scam during the ’90s was the Harshad Mehta Scam in 1992 which caused a huge dip in the stock market. A large number of small-size investors became victims of the scam and the Sensex fell more than 570 points.
  

• Dot Com Bubble was a stock market bubble caused by excessive speculation of internet-related companies in the 2000s. The Nasdaq Composite stock market index rose 400%, only to fall 78% from its peak by October 2002, losing all its gains during the bubble.
  

• The Global Financial Crisis hit in 2007–08, and a downturn in the US housing market was a catalyst for a financial crisis that spread from the United States to the rest of the world through linkages in the global financial system.
  

• Taper Tantrum 2013, was a panic kind of situation caused due to a spike in the U.S. Treasury yields. The Federal Reserves had announced that it would be reducing the pace of its purchases of Treasury bonds, to reduce the amount of money it was feeding into the economy.
  

• The 2016 Brexit impact was felt across currency markets with major equity indices losing 2–10%. The impact was that Sensex opened lower by 635 points and went down by 1,091 points
  

• March 2020 saw one of the most dramatic stock market crashes in history. The ongoing Covid-19 Pandemic caused the Sensex to fall from 41,952 on 14th Jan 2020 to 25,981 on 23rd March 2020 but made a swift recovery to touch all-time highs in June 2021.
  

So what do we do?

• A firm approach that we believe, is to down all the noise that can dampen your long-term investing psychology. When you’re seriously considering making sustainable long-term returns, the one thing to keep in mind is — Go long or Go home. It’s that simple.

• Growth in the Indian markets is robust and inevitable. Whether it’s the Fintech sector, Pharmaceuticals, or Agriculture, rapid innovation is happening everywhere which empowers the old systems making Companies much more efficient and profitable.

• If you have the power to remain in the markets for more than 5 years then you can ‘Safely’ invest in Equities.

At the end of the day, the key to successful investing is to make informed decisions that align with your financial goals and risk tolerance. And that's where the role of a financial counselor comes in. Learn how a financial counselor can mark a difference in your long-term financial building.

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