Volatility & Corrections are essential ingredients of Equity Outperformance

Above is a snapshot of how all major markets & major indices in India have performed over various time periods. These returns are not considering dividend/buybacks. The one month performance has taken away returns made over the last year. This tends to have a dampening effect & often one questions the stock/ asset class.  

Despite one of the worst months/ year so far, the 3/5/10 year periods clearly show Indian equities as a strong performer. No other asset class can generate these returns with on tap liquidity & lower taxation. Equity yields post tax returns of  11-14% versus debt/ FDs yielding 4-6%.

This data is simple & easily available then why is only 7% of India's financial savings are in equity versus 60% in fixed deposits ?

The answer to this is this beautiful month of May where indices have corrected by ~15% & individual portfolios by 20-25%. Equity participation is laced with volatility & thus many are willing to settle for 4-5% post tax returns versus 12-14% post tax returns in equity. They cannot stomach quotational losses or periodic underperformance. Many such investors exit at these panic points or just when the market is about to recover. The fear of losing capital or the negativity at that point in time is so strong that an investor makes irrational choices. 

It is very difficult to rationally explain/ predict these corrections or when/why they will end. However for an investor who considers time as partner, it is clear that equities hold the key to beating inflation & wealth creation. But nothing comes easy & definitely equity returns (Last 2 years were outliers). Equity returns come at the cost of  volatility, uncertainty, periods of negative returns & no guarantee of how/when will returns come. Yet history shows that businesses are the fastest to adjust & thus consistently deliver for themselves and minority shareholders. 

The Conservative Income Investor informs that when conducting an internal performance review of customer performance from 2003 to 2013, Fidelity learned that those with the best returns were "either dead or inactive."  Google "Fidelity dead investors" and you'll see a number of stories come up.

A seasoned equity investor thus embraces volatility & demonstrates faith in history repeating itself by simply being patient.