There has been a lot of turmoil in the equity markets around the world. October 2008 has been an extraordinary month for equity markets, with stock indeces sinking to their 3-5 year lows and the volatility index reaching alarming levels. But all said and done it is not fair to evaluate equity investments from a short term perspective. The longer your perspective the lesser the probability of your equity investments giving you a negative return.
The probability of loss in equity investments with a 1 year perspective is as high as 10/26 (ie. you are likely to witness an erosion in equity values in 10 out of 26 years. This probabilty keeps on reducing as your investment horizon increases: The probability of loss is 5/24 (3 years), 3/22 (5 years), 1/17 (10 years). That means that the chances of an investment giving negative returns is almost negligible in a 10 year period. And the average return given by BSE sensex over its history (1979 - till date) has been more than 17% per annum, doubling the value of your investment in slightly over 4 years. Is it possible to get these kind of returns from any other investment? Probably the answer will be no. The bad times in the equity markets will end over a period of time, investors have to be patient to reap the rewards from equity. But do keep booking profits from time to time to shore up your liquidity levels.
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