{"id":17631,"date":"2020-02-14T15:25:55","date_gmt":"2020-02-14T09:55:55","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=17631"},"modified":"2020-02-14T15:33:44","modified_gmt":"2020-02-14T10:03:44","slug":"sensex-at-1-lakh","status":"publish","type":"post","link":"https:\/\/fundsindia.com\/blog\/mf-research\/sensex-at-1-lakh\/17631","title":{"rendered":"Sensex at 1 lakh!"},"content":{"rendered":"

Usually, this genre of headlines gets extremely popular during the final phase of a bull market before it eventually fizzles out. And in later years, this normally becomes part of the blogging folklore on how euphoric \u2018magazine and newspaper headlines\u2019 ironically predicted the peak of the bull market.<\/span><\/p>\n

Now before you get worried that this is a classic contrarian signal for the market top, relax. This particular headline has a completely different context.\u00a0<\/span><\/p>\n

Read on to find out what\u2019s the context behind\u00a0Sensex at 1 lakh..<\/span><\/p>\n

Stay in equities for the long term… Yawn<\/b><\/span><\/h4>\n

The message that you must \u2018stay invested in equities for the long term and ignore short term declines\u2019 has been beaten to death.<\/span><\/p>\n

Several million articles have already been written on this.<\/span><\/p>\n

And yet…<\/span><\/p>\n

Long Term Equity Investors still remain a rare breed.<\/span><\/p>\n

Have you ever wondered why it is so difficult to stay invested in equities for the long run?<\/b><\/p>\n

All of us, thanks to our evolutionary roots, are wired to prioritize short term over the long term. So it is never easy for us to endure short term pain for long term gain.<\/span><\/p>\n

Fair enough.\u00a0<\/span><\/p>\n

But how come when it comes to Gold or Real estate we are able to hold on for several decades.\u00a0<\/span><\/p>\n

While the prices are obviously not as volatile as equities, there are still long intermittent periods of poor returns. Yet the majority of us comfortably hang on for decades.<\/span><\/p>\n

Maybe the secret to long-term investing has been hiding in plain sight, after all.<\/span><\/p>\n

The secret to long-term investing<\/b><\/span><\/h4>\n

Why do you think the same \u2018YOU\u2019 is able to pull off long-term investing in real estate and gold but not in equities?\u00a0<\/b><\/p>\n

The simple answer is: FAITH<\/span><\/p>\n

Unwavering Faith in the belief that Gold and Real Estate will do well over the long run!<\/span><\/p>\n

And when it comes to Equities, this is exactly where the root of the problem lies.<\/span><\/p>\n

Lack of faith in Equities for the long term.<\/b><\/p>\n

Whenever the market declines (which you should expect on a regular basis), your conviction on Indian entrepreneurship (read as equities) is put to test.<\/span><\/p>\n

A month back, it was US-Iran. Today, it is the Corona Virus. Tomorrow, there will be a different event to worry about. The only certainty is that equity markets will always remain uncertain and volatile in the near term with investors worrying about something or the other at all points in time.\u00a0<\/span><\/p>\n

Unless you get this basic ingredient called <\/span>faith <\/b>in place, it is impossible for you to stick to equities during a bad market.<\/span><\/p>\n

The million-dollar question – How do you get this faith in equities?<\/b><\/span><\/h4>\n

If you really think about it, Equity investing for the long term finally boils down to your belief in human progress and entrepreneurship<\/span>.<\/b> You are simply betting that entrepreneurs (who take a higher risk) on aggregate will get compensated with higher returns in the long run.<\/span><\/p>\n

Sounds logical. But where is the evidence?<\/span><\/p>\n\"Sensex<\/a>\n

As per the Credit Suisse Global Investment Returns Year Book 2019 (link<\/a>) which looks at the\u00a0past 118 years of equity returns across different countries,\u00a0<\/span>equity real returns (read as returns after adjusting for inflation) has been around 4-6% for most countries.<\/p>\n

Does it work in India?<\/b><\/span><\/h4>\n\"\"<\/a>\n

Source: <\/i>www.incometaxindia.gov.in<\/i><\/a>, MFI Explorer, FundsIndia Research<\/i><\/p>\n

For Indian equities, over the long run, equity real returns (read as returns after adjusting for inflation) have been around 6-7%.\u00a0<\/span><\/p>\n

Now that we have shown you the proof, are you ready to convert to a \u201clong term equity investor\u201d?<\/span><\/p>\n

If only life was so easy.\u00a0<\/span><\/p>\n

When it suddenly comes to dealing with emotions of watching your life savings decline each and every day in front of your eyes with no clue on when it will end, it is a different experience altogether. When your heightened emotions (via fear of losing it all) meets logic (of long term returns), you know by now, what will trump.<\/span><\/p>\n

While I don\u2019t promise to have a solution to make the emotional pain go away, here is a simple framing which I personally find useful to stay sane, especially when the markets are declining.<\/span><\/p>\n

Sensex at 1 lakh<\/b><\/span><\/h4>\n

Faith in the belief that equities will go up, in the long run, is the most critical ingredient needed for overlooking the near term declines and sticking to equities over the long run.<\/span><\/p>\n

So far so good.<\/span><\/p>\n

However, Equities will go up in the long run, is, unfortunately, a very vague statement.\u00a0<\/span><\/p>\n

What if we make it more specific?.<\/span><\/p>\n

While we are not predicting returns here, assuming a real return of 4-7% for equities as seen from global and Indian evidence, we can work out a rough return expectation of around 10-12% for equities over the next 10 years (at ~5 to 6% future inflation expectation).<\/span><\/p>\n

Currently, the Sensex (as on 03-Feb-20) is close to 40,000.<\/span><\/p>\n

When will the Sensex reach @1,00,000?<\/span><\/p>\n