Are Equities Really the Best Way to Compound Wealth in the Long Run?

On the other hand, low-risk investments such as debt gave even more modest returns which after adjusting for capital gains taxes (which are bizarrely high on Indian debt if you are a domestic investor) are barely 4% per annum.

So, what is a retail investor to do with her wealth India given that equities are risky and give modest returns and bonds give sub-par returns?

Enter the 30 year Asset Allocation Quilt

To answer this question, we looked at long term returns from five widely available assets which have low correlation with each other:

To make the exercise as rigorous as possible, we went as far back in time as was practically possible from a data availability perspective. We used data on S&P500, gold and cash from 1996 onwards. We used data on the Nifty50 from 2000 onwards and we used data on debt from 2003 onwards. We then calculated annual returns from each of these 5 asset classes to create what we call the 30-year Asset Allocation Quilt – see below.

• Owning all five asset classes in equal measure — 20% each, rebalanced every 1 January — compounded at 11.3% a year over the full 30 years (1996–2025), turning ₹1 lakh into roughly ₹25 lakh.
• It did so with a remarkably smooth ride: annual-return volatility of just 7.9% (versus 28% for the Nifty), only 3 losing years in 30, and a worst year of just −6%.
• In the 2008 crash the Nifty fell 51% and US equities (in rupees) fell 22% — but gold rose 28%, debt 9% and cash 6%, so the basket lost only 6%. That is the entire case for diversification in one year.
• No single asset wins for long. The annual winner changed almost every year; last year’s number-one repeated only 37% of the time. Chasing the previous winner failed nearly two-thirds of the time.
• The basket earned 81% of the best single asset’s return (S&P 500 in INR, 13.9%) for barely a quarter of the Nifty’s turbulence. Most of the return, a fraction of the stress — that is the point.
• Does last year’s winner stay on top? Answer:  Almost never — the previous year’s number-one repeated only 37% of the time. Chasing it failed nearly two-thirds of the time. Of the 30 year-to-year transitions in the quilt’s top row, the leading asset class held its crown only 11 times. The other 19 times, money that piled into last year’s star backed the wrong horse. This is the data behind the warning every adviser gives and every investor ignores: performance-chasing is a structurally losing strategy, and the quilt proves it.
• In this 30-year window (1996-2025) annual rebalancing slightly reduced return (versus just owning the Nifty50) BUT DRAMATICALLY REDUCED RISK. In fact, if you look at the table below, you will see that with just 1/4^th the volatility associated with equities, an annual weighted Multi-Asset Portfolio (MAP) generates returns which are comparable to equities (11.3% vs 13.2% for Nifty 50). In other words, for every unit of risk taken, MAP gives you 1.43 units of return. In contrast, the Nifty50 fails miserably on this front – for every unit of risk taken, it gives just 0.47 units of return i.e. MAP is 3x as good as the Nifty50 in generating low term risk-adjusted returns.

• Map your life goals to financial goals. How much do you need for near, medium, and long-term goals?
• Allocate your investments across multiple uncorrelated asset classes. Avoid over concentration, illiquidity and disproportionate risk-reward. Get the allocation right based on your needs and your risk tolerance.
• Remain disciplined. Continue to save and channel savings to investments. Review and rebalance regularly.