Since the last five years, the stock markets have been flat and have provided no opportunity for investors to have any returns. It is but natural for investors to be shunning equities at present. With the volatility and the depressed conditions investors are preferring to keep their money in cash or absolutely safe fixed income securities. The charm of gold which existed last year has also faded. Real estate is also not as one would call a secured investment either. How do you turn it in to a pile of cash to meet your retirement needs?
Investors are suffering from Loss Aversion and are fleeing to the safety of fixed income securities. They are averse to any loss that may arise by buying equities. The pain of a loss is three times more than the pleasure of an equal amount of gain. Pain over time becomes terrifying and pleasure over time becomes boring. Hence this aversion to equities.
Here is where we need to do some practical thinking and see what history tells us. We did some research and this is what we have found. See the chart below.
From 1979 when the BSE Sensex came in to being till March 2013 we have calculated the returns from equities, from fixed income securities like bonds and also keeping cash in savings bank. The calculation of returns from equities is without reinvested dividends. Inflation is from the IMF data. Taxes are assumed at 30%.
Thirty four years of data throws up some startling facts. After inflation and taxes stocks have returned 5.29%. Had you been an investor in bonds or kept cash in banks you had negative return of .42% and 4.22% respectively after inflation and taxes. This is the data over a fairly long period and no fluke.
So if you are looking at your retirement you just cannot miss out on equities if you want to hedge yourself against inflation. I am not asking you to open a trading account and blindly take the plunge. Go easy, invest in a good well managed fund. Think long term. This is not the time to be loss averse. It is time to be greedy rather than fearful. No one knows how long the depressed conditions will last but I know one thing: nothing is permanent. Want to time the markets? Sure, go ahead and go for Systematic Investment plans.
