What returns have stock markets given in last 1 year?
What have been annual returns given by Nifty and Sensex?
What have been Nifty returns since inception?
These are some questions that gain popularity as year comes to an end. During this time, we all have this uncontrollable urge to ‘know’ how markets have done in last one year. And how it compares to annual returns of last few years.
But still, we do get attracted to annual return figures. Isn’t it?
So as we have completed another year, I have decided to analyse annual returns of widely tracked market index Nifty50 – a widely tracked index of the Indian stock markets, which is made up of shares of 50 largest Indian companies.
Nifty50 closed 2016 with gains of about 3%.
This is obviously much lesser than what we have achieved historically.
Nifty has a CAGR of 11.7% in last 20 years (since 1996) and 7.5% in last 10 years (since 2006). But that is the nature of markets. The average figures will not be achieved every year. Also for SIP investors, it is important to understand that these returns will be different from your rolling SIP returns (but we will discuss that some other day).
So below is the Nifty historical chart showing annual Nifty returns since inception (2+ decades):
To see this from another perspective, have a look at table below. It gives you the current value of Rs 1 lac invested in Nifty50 every year since 1995-96:
As already mentioned, looking at average figures has its own pitfalls. An average of 12% annual returns might sound great on paper. But it requires you to witness -30%, +20%, 5%, -15%, 13%, etc. for few years. You won’t get that 12% fixed returns, no matter how much you want it. 🙂
So obviously, the 2-decade long journey has been a volatile one. In last 21 years, we have had:
- 14 years with positive returns
- 7 years with negative returns
You might draw out the conclusion that more often than not, markets will give positive returns.
That is true. But how much of that return will be captured in your portfolio is another matter.
So if you had invested somewhere in 2002-2003, the annual index returns after that have been 3.3%, 71.9%, 10.7%, 36.3%, 39.8%, 54.8%. And this is not normal. This was unprecedented and chances are high that such a sequence of high positive returns, might not get repeated again during our lifetimes. So do not have such expectations of multi-year high returns from stock markets.
Infact, we should be ready to face ugly years like 2008-2009 – when index itself fell by more than 50% and individual stocks crashed by 80-90%. I have said countless times that one should invest more in market crashes or when everyone else is giving your reasons to not invest.
But that is easier said than done. When crisis like the one in 2008-2009 comes, it is not easy to combine your cash with courage.
But that is what separates poor investors from good ones and, good ones from great ones.
Now we have seen Nifty’s historical annual returns for last 21 years. But that gives us only 21 data points to look at (even though it covers Nifty returns since inception). And that is not sufficient to draw out any meaningful conclusions.
Ofcourse it is interesting to look at annual return figures. These give us a benchmark to compare our own portfolio’s performance.
But it is very important to understand what these annual figures won’t tell you. We can pick and choose data to prove almost anything – as it has been rightly said – “Torture numbers, and they’ll confess to anything.”
You might find people telling you that markets can give you 15-20% returns. And they might even show you data to prove it. But just picking one particular Nifty 5 year return period or even a 10-year period will never give you the complete picture. You need to see how markets have behaved in ‘all’ such 5-year and 10-year periods.
So when talking about annual returns, lets not just evaluate year-end figures. Instead, lets analyse rolling 1-year returns. That will give us a better picture.
Nifty historical data is available starting from July 1990. So that is where we start.
Now to calculate one-year rolling returns, we pick every possible 1-year period between July 1990 and Dec-2016 (on a daily basis).
So we have the following:
- 3rd-July-1990 to 3rd-July-1991 – 1st one-year period
- 5th-July-1990 to 5th-July-1991 – 2nd one-year period
- 31st-Dec-2015 to 30th-Dec-2016 – Last one-year period
In all, there were about 6146 rolling one-year periods.
And this is what Nifty did in these several thousands of one-year periods:
And here is the graph for these returns:
If you study the graph carefully, you will find interesting things. Some 1-year periods have seen returns of more than 100%. But there are also periods of major cuts (like early 2000s and 2008-2009).
Now one obvious thing to note here is that when rolling returns are low for sometime, then chances are high that rolling returns will increase in near future (as can be seen in sharp upmoves after low returns in above graph).
You might see it from the PE-lens of investing more at lower PEs or investing more when Nifty performance in last few years has not been good.
I leave it upto you to draw out your own conclusions.
Another important point to note here is that these graphs ands tables are based on Nifty50 index levels. It does not reflect the impact of dividend reinvestments.
The index that captures ‘dividend reinvestments’ is called the Total Returns Index (TRI). SO basically, Total Returns Index or TRI is Nifty including Dividends.
I won’t be doing the detailed annual or rolling annual return analysis of TRI here. But to give you a perspective of how dividend reinvestment can impact your returns, I will compare the regular Nifty50 with TRI here:
As you can see, there is a decent difference in index levels (with and without dividend reinvestments). It is for this reason that one should try to reinvest the dividends as much as possible.
2016 turned out to be damp squib for people who get a high by seeing high annual returns.
But for us long term investors, a year of low returns comes with a lot of opportunities if we are observant enough. And I am not just talking about index levels here. Even individual stocks offer various opportunities by oscillating between their 52-week highs and lows.
As for 2017, there is no point predicting what will happen.
But with so many big triggers operating in tandem (demonetization, GST, New US President, US Fed, falling interest rates, known unknowns, unknown unknowns, etc.), it will be an interesting year no doubt. So lets not rush and instead, wait for another 365 days to see how Nifty50’s next annual returns figure turn out to be.