What They Didn't Tell You About Your Fixed Deposit Investments

Apr 3, 2018

Rahul Shah, Editor, Profit Hunter

Most people think stocks are riskier than fixed deposits/bonds.

If you are one of them, you're dead wrong. Especially if you're investing for the longer term.

Lest you think I've gone cuckoo, let me quickly tell you this absurd sounding idea finds a backer in none other than Warren Buffett himself:

    It is a terrible mistake for investors with long-term horizons - among them, pension funds, college endowments and savings-minded individuals - to measure their investment 'risk' by their portfolio's ratio of bonds to stocks.

'Long-term', of course, is the key here.

But if you are listening to me at all, you are probably a long-term investor - so this is for you.

You see, stocks go all over the place in the shorter term. The fluctuations can be big enough to unnerve the most seasoned investors.

This volatility scares investors away, and gives equities a bad name.

But, as you increase the time frame for your investment, the volatility starts coming down.

Nonetheless, just how much does it really come down... say, you invest in the share markets for a five-year period?

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I looked at the data, and did the calculations.

Starting from 1990 over the next quarter of a century, here's how an investment each year in the BSE Sensex would look five years later:

Year Change Over Next 5 Years
1990 404%
1991 197%
1992 62%
1993 40%
1994 -9%
1995 27%
1996 28%
1997 6%
1998 -8%
1999 91%
2000 32%
2001 137%
2002 323%
2003 501%
2004 65%
2005 165%
2006 118%
2007 12%
2008 -4%
2009 119%
2010 57%
2011 27%
2012 72%
2013 75%
Data source: Bombay Stock Exchange

You actually see a loss in only 3 of the 24 five-year periods since 1990.

And that too just low single digit losses.

But if you increase the holding period by just another year to six years, something fascinating happens!

Year Change Over Next 6 Years
1990 299%
1991 194%
1992 92%
1993 17%
1994 50%
1995 1%
1996 5%
1997 9%
1998 60%
1999 116%
2000 88%
2001 247%
2002 522%
2003 186%
2004 199%
2005 211%
2006 64%
2007 41%
2008 4%
2009 185%
2010 50%
2011 30%
2012 120%
Data source: Bombay Stock Exchange

You would not have seen a single loss in any six-year period over the last quarter century!

True, a few of these six-year periods end with very dull returns. But then again, that's like saying the worst that could happen over any given six-year period is I make little or no money but my capital remains intact.

Okay, so safety-of-capital wise I'm very low on risk.

But what about returns?

Remember, low returns is the worst-case scenario (cos there are no losses, right). Much more often than not however, over any given 6-year period, as the table above shows, you'll be walking away with handsome returns indeed!

As you increase your investing horizon beyond five-six years, stocks quickly start looking like a 'low risk-high return' instrument.

And the bigger risk then becomes earning little or nothing by way of inflation-adjusted returns with debt instruments like fixed deposits and bonds.

A terrible mistake indeed for investors with long-term horizons!

Good Investing,

Rahul Shah
Rahul Shah (Research Analyst)
Editor, Profit Hunter

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1 Responses to "What They Didn't Tell You About Your Fixed Deposit Investments"

Tamal Kumar Banerjee

Apr 3, 2018

Hello Sir,
I used to have your mails off and on, sorry to say, no time, or no interest in making "long time Investment" Life is best at short, nobody knows what will happen tomorrow... This "TOMORROW" I must say "MAHAKAL" Moreover long term investments are no doubt prudent decision, but at the same time Long term means long darkness about the money devaluation, so if you calculate the same at the present valuation it will comes to the same footing, where we are today. So short term, may be the return is low, but less risky, less outcomes, but more physical enjoyment( When money is everythings), if not then you have the rest of the World to enjoy. I prefer short term, advice me.
Thanks,T.K.

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