Share Market Returns Are Also Risk Free

Share Market Returns Are Also Risk Free

Huummmm!!! Share market is the most dreaded investment for many people. Harshad Mehta in 90s, Ketan Parekh in 2002-04, Subprime Crisis in 2008-09, Satyam Scam etc. fractured the confidence of small investors at very large scale and people think that share market is not their cup of tea because it is risky. There is risk of losing capital completely. Yes of course, it is true.

As a Financial Planning believer, I was reminded of a lecture I attended on share market investment in 2007. The faculty was an expert from IMD Gurgaon. He showed us (the trainees) an excel sheet which stated that investment in BSE SENSEX is riskfree if investor stays invested for at least 15 years. Just after a year of this lecture, subprime crisis happened and everybody witnessed the bloodshed in Dalal Street..

I thought let me test my MS Excel skills and retest the notion “15 year long investment in share market is riskfree". So here is my analysis of SENSEX starting from 1975 to 2012. I took four strategies of investment—A) Buy SENSEX in ith Year and Sell SENSEX after (i+1)th Year, B) Buy SENSEX in ith Year and Sell SENSEX after (i+5)th Year, C) Buy SENSEX in ith Year and Sell SENSEX in (i+10)th Year and D) Buy SENSEX in ith Year and Sell SENSEX in (i+15)th Year. The table below shows the results---

Buy on ith Year and Sell on (i+1)th Year Buy on ith Year and Sell on (i+5)th Year Buy on ith Year and Sell on (i+10)th Year Buy on ith Year and Sell on (i+15)th Year
Total Negative Returns Years 12 3 2 0
Chances of Negative Returns 36% 9% 0% 0%
Chances of getting Returns less than 7% p.a. 39% 15% 9% 0%
Maximum Returns Earned 267% 195% 192% 189%
Minimum Returns Earned -47% -4.3% -1.9% 10.9%

We can observe from the table that there is negative returns year when investment horizon is at least 15 years. The range of returns for 15 year investment is between 189% to 10.9%. it is evident that chances of getting any negative returns from sharemarket in 15 years tenure is theoretically zero and minimum expected returns are not less than 10%. Hence, I think the opinion of expert from IMD still holds good.