InvestorQ : How have equities managed to create so much wealth over the long run?
Arti Chavan made post

How have equities managed to create so much wealth over the long run?

Anu Biswas answered.
3 years ago

Globally, it is equities that create wealth over the long run. Don’t get disappointed by the short term volatility but focus on the long term wealth creation capacity.

Equities are a share of the company ownership and therefore participate in the growth. This is very important for a growing economy like India, which is why equities give such attractive returns in India.

The power of compounding works in favour of the investor when they stay invested in equities. When the company grows, then the growth gets reinvested in the stock in the form of better valuations which results in higher growth.

When it comes to equities, it is time and not timing that matters. It does not matter whether you invest at market highs or market lows. As long as you can keep investing consistently in quality equities, you are likely to generate wealth through equities.

Equities benefit from a variety of factors like changes in macro factors, changes in industry level factors, changes in global trends etc. Over a longer period of time, the positive impact tends to outweigh the negative impact, at least in the case of high quality companies.

While equities are theoretically more risky than debt and money market, it is possible to intelligently manage this risk. An investor can reduce the risk in equities by diversification across stocks. Investors can also reduce their risk by researching and constantly evaluating the stocks that they are holding. Above all, there is the mutual fund route available for investors who do not have the time or capacity to track equities on a daily basis. It is this flexibility in terms of risk management that enables to consistently generate superior returns over the long run.