Does Long-Term Investing Reduce the Risk of Negative or Low Returns?

Does Long-Term Investing Reduce the Risk of Negative or Low Returns?


One of Warren Buffett's famous quotes mentions that the first rule of investing is to never lose money, and the second rule is to never forget the first rule. Warren Buffett has made a fortune from stock market investments. However, stock markets can be volatile in the short term and can lead to losses during big falls in reaction to certain event/s. However, in the long term, markets always recover the earlier losses and go on to make new highs. So, how long should long-term investing be to reduce the risk of negative or low returns? Let us discuss.

 How Long Should Be the Investment Time Horizon to Reduce the Risk of Negative Returns?

Experts always recommend that retail investors should invest through the systematic investment plan (SIP) route for long term investing. So, how long should be the investment tenure to reduce the risk of negative returns?

A Mutual Fund house analysed the S&P BSE Senex TRI data for SIP investments from September 1996 to December 2023. Following is the observation.

 

SIP Period

% of Times Positive Return

3 years

84%

5 years

91%

8 years

100%

10 years

100%

12 years

100%

15 years

100%

 

The above table shows how the instances of positive returns increase as the SIP investment time horizon increases. When the investment time horizon was 8 years and above, the returns were positive 100% of the time. In other words, when the investment time horizon was 8 years and above, the instances of negative returns were 0%.

So, the higher the investment time horizon, the higher the probability of earning positive returns.

A similar analysis was done with the Nifty 50 TRI data.

Nifty 50 TRI data

Note: The data considered is from 30th June 1999 to 30th April 2024

The above table shows if an investor stayed invested in the Nifty 50 for a time horizon of 7 years and above, instances of negative returns were 0%.

So, the longer your investment time horizon, the lower the probability of getting negative returns.

How Much Return Can You Earn in the Long Term?

In the earlier section, we saw how the instances of negative returns reduce or go down to 0% as the investment tenure increases. But, how much returns can you earn by staying invested for the long term?

As per the Mutual Fund, the XIRR rolling returns on a monthly basis for S&P BSE Sensex TRI for SIP investments between September 1996 to December 2023. The results were as follows.

Returns

3 Years

5 Years

8 Years

10 Years

12 Years

15 Years

% Times More Than 8% Return

64%

82%

94%

99%

99%

99%

% Times More Than 10% Return

56%

72%

81%

94%

98%

97%

% Times More Than 12% Return

50%

59%

68%

78%

76%

90%

 

The above table shows:

  1.  When the investment time horizon was 10 years and above, 99% of the time, the returns were more than 8%
  2. When the investment time horizon was 12 years and above, 97-98% of the time, the returns were more than 10%
  3. When the investment time horizon was 15 years and above, 90% of the time, the returns were more than 12%

So, the longer the investment time horizon, the higher the probability of earning decent returns in the 10-12% range. Please note the above returns are for the BSE Sensex 30 Index. Over the long term, the returns for mid and small-cap indices can be better, although with higher volatility.

Long-Term Investments Reduce Volatility In CAGR

After looking at the probability of negative/positive returns in the long run, let us now look at the volatility of returns. In the short run, the range in which your CAGR returns will fluctuate can be quite large. However, as time passes by, in the long run, the volatility of CAGR returns reduces, and moves in a narrow band.

CAGR Returns In Short And Long-term

CAGR Returns In Short And Long-term

 

In the short term, stock markets can be volatile. As a result of the sharp up and down moves in the markets, your CAGR returns can be very volatile in the short term. The above chart shows in the first ten years, the CAGR fluctuated in the +/- 20% range. However, after a reasonable amount of time, the CAGR stabilises. After ten years, the CAGR is seen moving in a narrow +/- 3% (10 to 13% CAGR) range.

Why Should You Invest for the Long Term?

As we have seen in the earlier section, the risk of negative returns reduces in the long term, and the probability of positive returns increases. The longer the investment time horizon, the better the probability of earning higher returns.

In the long run, you give your money time to grow and benefit from the power of compounding. With regular monthly SIP investments and the power of compounding, your money can grow exponentially over a period of time. It will help you accomplish your financial goals and achieve financial freedom.

To reach your financial goals faster, you can opt for step-up SIP. With step-up SIP, you can increase the monthly SIP amount by a specified percentage or an amount on an annual basis. You can opt for the step-up SIP of 5 to 10% annually, in line with the growth of your annual income. 

Type of SIP

Monthly Investment

Investment Horizon

Expected Returns

Amount Accumulated

Regular SIP

Rs. 10,000

20 years

14% CAGR

Rs. 1.31 crores

Step-up SIP – 10% annual increment

Rs. 10,000

20 years

14% CAGR

Rs. 2.48 crores


As seen in the above table, in the long run, a step-up SIP can help you accumulate a significantly higher amount than a regular SIP when you start both SIPs with the same amount.

Invest for the Long Term and Stay Focused on Your Financial Goals

Before you start investing, work with an investment expert who can make a financial plan for you. The plan will have all your financial goals with a roadmap to achieve them. When you start investing, map your mutual fund investments to your financial goals. It will help you become a disciplined investor.

Stock markets can be volatile in the short term and can undergo corrections. However, staying focused on your financial goals will help you continue with your SIP investments over the long term. With time, markets will bottom out, recover, and make new highs. Thus, in the long run, the risk of negative returns reduces, and the probability of positive returns increases. The longer the investment time horizon, the better the probability of earning higher returns.

Investment Time Time Horizon In Investment Time Horizon Investing

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