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Ditch the Risky Fixed Deposits for Safer 'Bluechip Deposits'

Oct 30, 2019

Richa Agarwal, Research analyst

Investors never questioned fixed deposits before.

With many losing their money in PMC Bank's fixed deposits, that understanding has completely changed.

But there's one more misconception that many have still not woken up to...

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

If you are one of them, well, you're 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 ace investor Warren Buffett too:

  • 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.

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 if you invest in the share markets for a five-year period?

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%
2014 70%
2015 45%
Data source: Bombay Stock Exchange

You'd actually see a loss in only 3 of the 26 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%
2013 86%
2014 88%
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 (because 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!

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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.

You're not going to become any richer if your capital grows at the fixed deposit rates of about 6% yearly, more or less matching the rise in prices of things you will consume.

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

Because you'd end up much wealthier by investing in 'bluechip deposits' instead. These are high-quality companies who have extremely strong financials and businesses, and have strong management teams at the helm.

These businesses will gain the most from the transformation that is taking place in the economy currently. Thus making their investors rich beyond their wildest dreams...

My collogue Tanushree Banerjee has identified 50 big, irreversible trends, which are the pulse of India's economic transformation - Rebirth of India.

Plus, she has spotted seven bluechip stocks which stand to gain immensely from the Rebirth of India.

Tanushree calls it a once-in-a-2,000-year opportunity. Read more about it here.

If you looking to make the most profitable investments in the safest manner possible - and have a long term horizon - you won't find a better opportunity than this.

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

PS: The Rebirth of India is a once-in-a-lifetime phenomenon and smart investors can use it to amass wealth which could potentially last generations. Read more about it here.

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1 Responses to "Ditch the Risky Fixed Deposits for Safer 'Bluechip Deposits'"

Abhishek Kumat

Oct 30, 2019

Sounds quite absurd to equate the benchmark performance with a few selected stocks .... your hypothesis and recommendation would be in line if you had said to invest in Benchmark ETFs vis a vis fixed deposits over a longer period timeframe .... But putting selected stocks into the picture by replacing the benchmark is quite delusional ... As equitymaster has many times said that the performance of benchmark is always geared to the best large cap performing stocks over a period of time and filters out the poor performers on an ongoing basis

Equitymaster requests your view! Post a comment on "Ditch the Risky Fixed Deposits for Safer 'Bluechip Deposits'". Click here!