The 'Gap' In Long-Term Returns

There is a significant gap in the nominal and inflation-adjusted returns across asset classes. So, reading long-term trends is important before making investing decisions

- RAJAN RAJU

History often repeats itself. Those who forget history are doomed to repeat it! These maxims hold equally true for investing, which is not solely about making quick decisions, but about understanding how various types of investments perform over time.

A study of mine on asset returns in India's financial markets, titled, Long-Term Asset Returns in India: A Historical Survey (1992-2024), published on the Social Science Research Network, bit.ly/3PSBArw, throws up some interesting insights on major assets, such as equities, gold, fixed deposits (FDs), bonds, and real estate. The study consolidates data from different sources, enabling readers to explore trends and appreciate the risks and rewards of each asset, and make informed choices.

Findings

Each asset class tells a unique story over the past three decades.

Equities-Long-Term Winner, But Not Without Risk: Equities have historically provided the highest returns over the long term, averaging 16.7 per cent annually in nominal terms. But adjusted for inflation, they decrease to 9.5 per cent.

Equities also face significant drawdowns when their value declines sharply from a previous peak.

Over a rolling five-year horizon, equities have experienced real drawdowns in a quarter of all rolling fiveyear periods. But over rolling 10-year periods, they have recorded negative returns in one in 10 periods. This highlights the importance of remaining invested through lengthy periods to realise equities' long-term growth.

Gold-A Reliable Safe Haven: Gold's average annual returns of 10.2 per cent (nominal) and 3.2 per cent (real) highlight its role as a hedge against uncertainty. However, gold has also faced real drawdowns over a third of all rolling five-year periods and over a fifth of all rolling 10year periods, a reminder that even safe-haven assets are not immune to losses over long periods.