Choosing the best mix of investments requires putting your money into things that give good returns without too much risk. Should you invest your savings in stocks? Stocks can grow quickly but also lose value fast. Or should you choose steady investments like bonds that pay interest reliably? Real estate also combines rental income with growth over time.
Looking at the average yearly return and risk of stocks, bonds, real estate, and other significant investments helps you decide what’s best for your goals and comfort with risk. Seeing how much each tends to gain or lose year over year shows where to put your money wisely.
The right investment mix depends on your time frame and attitude about ups and downs. Knowing the differences helps build the most suitable portfolio.
Understanding CAGR:
CAGR indicates the average annual return generated by an investment over a specific period, smoothing out interim volatility. It helps investors accurately calculate earnings potential and compare diverse financial instruments and asset classes.
For instance, during market swings, a stock may surge 60% in one year but decline 20% in the next. CAGR factors in these fluctuations, calculating the regular compounded annualised gain over its entire holding period.
CAGR differs across various avenues, such as equities, fixed income, and tangible assets, based on their inherent risk-return characteristics. Let us analyse them one by one.
CAGR Performance of Stocks:
Equities represent fractional ownership interests in businesses listed on stock exchanges. Historically, stocks have delivered high inflation-adjusted returns over long investment horizons despite short-term turbulence.
Large-cap shares have offered around 15% CAGR in India over 15-20 years. Due to their expansion runways, actively traded mid/small-cap companies have provided even higher 20%+ compound returns.
However, equity returns also demonstrate extreme volatility over shorter durations, reacting to:
- Quarterly financial results
- Economic growth cycles
- Market-wide fluctuations in sentiment
Such turbulence is smoothed in long-term stock CAGR. Top-performing shares have delivered above 25% annual returns over decades-long holdings. Even broader market indices have generated around 15% compounded gains annually over extended timeframes.
CAGR Track Record of Bonds:
Bonds are tradable debt instruments that offer investors fixed interest payouts until maturity in return for lending money. As fixed-income assets, bonds offer more stability despite the lower historical CAGR in India’s 6-9% range.
By lending to extremely secure issuers like the central government, sovereign bonds can provide 7-9% annual returns over long periods with minimal default risks. Certain state development bonds have previously offered up to 10% CAGR.
Corporate bonds may provide CAGR closer to 11-12% by bearing slightly higher credit risks. However, the compound returns from debt instruments are capped due to their intrinsic structure.
Bonds are attractive because they offer fixed income certainty instead of fluctuating dividend payouts from equities. However, this certainty comes at the cost of lower historical CAGR over extended horizons.
CAGR from Real Estate Assets:
Owning physical property like land, apartments, etc., has generated high teen CAGR over long holding periods in India. Residential real estate has delivered around 15% annual returns on average, while commercial assets have touched as high as 18% CAGR during property market upcycles.
However, real estate returns also suffer from intermittent volatility during each business cycle:
- Housing prices may spike 50% in boom years as demand outpaces supply
- But decline by 40% during market changes when unsold inventory piles up
While rental yields create some base predictable income, substantial real estate gains result from property price appreciation, which tends to be irregular across locations and unpredictable over different timeframes. Lack of liquidity is another constraint, as investors may find it challenging to quickly convert real estate assets into cash without potentially compromising on valuation.
So, real estate CAGR lies between the high but unpredictable returns of equities and the steady but lower yields of bonds over complete investment horizons spanning property market cycles.
Comparative Analysis of CAGR Metrics:
Now that we have developed a basic understanding of CAGR generated across the three core asset classes historically let us compare them:
- Returns: From a pure returns perspective over long-term holdings, stocks and real estate have delivered superior inflation-adjusted CAGR in the 15-25% range compared to the 6-9% range for fixed-income instruments like bonds.
- Safety: Given their corporate credit ratings, bonds offer maximum capital preservation. Real estate carries moderate risk, while equities are prone to extreme price volatility influenced by external events.
- Liquidity: Stocks offer the highest liquidity, enabling investors to enter or exit quickly. Selling real estate becomes challenging without compromising on price or waiting periods. Bonds, too, have modest secondary market activity only.
- Taxation: Interest income is taxed at higher slab rates than preferential capital gains tax rates applicable on profits from equity and property. The latter enjoy beneficial tax treatments that increase their post-tax CAGR.
No asset category emerges as the undisputed choice across parameters—each has distinct pros and cons. Strategic allocation that is aligned with financial objectives and risk appetite is critical.
A young investor with a longer time horizon may allocate more portfolio weight to equities and property for long-term growth. One nearing retirement could increase bond allocation for stable income.
Moderating Return Expectations:
Blindly projecting past CAGR trends into the future can lead to inaccurate and flawed conclusions. Return assumptions must factor in likely economic scenarios:
- Stocks: India’s GDP expansion likely averages 6-7% annually; corporate earnings may thus grow 12-15%, driving similar future equity CAGR.
- Bonds: The sovereign bond CAGR is around 7%, and corporate bonds offer around 8-9%, which aligns with the interest rate trends.
- Real estate: Property prices must stay within income levels over extended periods. To reflect this connection, build an 11-13% CAGR estimate, balancing income growth and property value appreciation within realistic economic parameters.
The key lies in evaluating assets based on optimistic historical CAGR and a balanced perspective that weighs risks, volatility, liquidity, etc., rather than getting moved by past return patterns alone. This leads to judicious portfolio asset allocation for achieving long-term investment objectives.
If you’re unsure how to assess the CAGR for your specific investments, a CAGR Calculator can help you estimate your potential returns based on historical performance.
Conclusion:
CAGR helps compare returns across stocks, bonds, and real estate. No asset delivers on all fronts—equities and property have generated higher historical growth but with volatility, while bonds offer stability despite lower returns. Strategic allocation aligned to goals and regular rebalancing are key.
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