Making Money ≠ Making Money Every Year

"May you have surplus year after year" is an ancient New Year's blessing, and naturally, when ordinary people invest in wealth management, they also hope to make money every year. In the A-share market, actively managed funds have brought investors decent long-term returns. Over the 10-year period from 2011 to 2020, the CSI Active Stock Fund Index (which can be seen as the weighted average performance of actively managed equity funds) had an annualized return of 10%, with a cumulative return of 165%.

However, the fact that holding for 10 years can yield a profit of 1.65 times the principal does not mean that every single year is profitable. This is because the annualized return is a concept of average, as shown in the figure below. In 2011, 2016, and 2018, if we bought at the beginning of the year and sold at the end of the year, not only would we not make money, but we would also incur losses of more than 10%.

Therefore, there is a risk of short-term losses in fund investment, and even if some stock funds have achieved returns of more than 10 times, they are not profitable every year. Investors can smooth out the short-term cyclical fluctuations of the market by holding long-term to achieve good returns.

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Notes:

1. Annual return = (Last trading day's closing price - First trading day's opening price) / First trading day's opening price;

2. Annualized return is calculated based on the calendar days, with one year = 365 days;3. Past performance of indices does not predict the future. Investing in funds carries risks and should be approached with caution. The short operating history of funds in our country does not reflect all stages of the development of the securities market.

In the long term, equity assets are investment vehicles with higher returns.

In life, we earn labor income through employment and hard work. Beyond that, we can also generate property income through investment and financial management by investing in stocks, bonds, gold, and other assets. On one hand, this helps to preserve and increase the value of our income accumulated through labor, and on the other hand, it also yields investment returns. So, how should we choose? What are the return situations of different types of assets?

The domestic securities market has a relatively short history. Let's review the historical data from the United States from 1890 to 2020. Over these 130 years, the U.S. CPI increased by an average of 2.6% per year. Whether investing in financial assets such as stocks and long-term government bonds, or in physical assets like gold, crude oil, or real estate, all can outperform inflation. Among them, stocks had the highest annualized return rate, reaching 9.5%, while 10-year Treasury bonds were at 4.7%. Gold, crude oil, and real estate had annualized returns slightly higher than inflation, at 3.5%, 3.0%, and 3.2%, respectively.

The long-term return on equity significantly exceeds that of other assets, with a wealth appreciation effect that is far ahead. If you invested 1 U.S. dollar in the S&P Composite Index in 1890, it would have grown to $38,800 by the year 2000, and increased to $128,000 by 2020. The same 1 U.S. dollar invested in 10-year Treasury bonds would only amount to $395 by 2020, with gold yielding only $85, and real estate $62.

The returns on stocks come from corporate profits, which in turn are based on the continuous development of the economy. Historical data from the United States indicate that holding equity assets allows one to share in the fruits of economic growth to the greatest extent. There are mainly two ways to invest in equity assets: one is to trade stocks directly, but individual investors are generally limited by factors such as professional knowledge, capital size, and time and energy, making this approach quite risky. The other way is to invest through equity mutual fund products, which have characteristics such as professional management, risk diversification, strict regulation, and transparent information, allowing investors to participate in stock investments with smaller amounts of capital.

From December 31, 2004, to May 12, 2021, the annualized return of the CSI 300 Total Return Index reached 12.58%, with a cumulative return of 558%. Looking forward to the next few decades, China's economy will rely on the advantages of a super large-scale market and the potential of domestic demand, maintaining a high-quality and sustained growth trend under the guidance of a strategy of technological innovation. At the same time, the registration system for stock issuance and the normalization of delisting mechanisms will further enhance the vitality and quality of China's stock market. Long-term investment in Chinese equity assets can effectively overcome inflation and achieve better returns.

Notes:

1. Data sources: E Fund Internet Investment Education Base, OurWorldinData, MeasuringWorth, Robert Shiller, EIA, FRED, CEIC, and the Research Department of CICC;

2. The returns of various assets are calculated based on the year 1890 as the base year and converted into a constant base index. The U.S. stock returns are calculated based on the S&P Composite Stock Index + dividends of the constituent stocks; the 10-year U.S. Treasury bonds are calculated based on the interest + capital gains of the 10-year Treasury bonds; the housing prices use the U.S. Case-Shiller House Price Index.3. Past performance of an index does not predict the future. Investing in funds carries risks, so exercise caution when investing.

Can investing in stock funds result in a loss?

Stock assets carry a higher risk and potentially higher returns. Stock funds, which primarily invest in stocks, can reduce some portfolio volatility through diversification, but the net value of the fund will still fluctuate. Investors who prioritize "safety first" are very concerned about whether they might lose money by investing in stock funds. The future is unpredictable, but we can look at the data from the past 10 years to inform our perspective.

At the beginning of 2011, there were 306 actively managed equity and equity-mixed funds in the market. Suppose you randomly purchased one of these funds from January 1, 2011, and despite experiencing several significant market fluctuations along the way, you held onto it until December 31, 2020. The likelihood of you losing money would be less than 1%. This is because out of the 306 sample funds, 305 made a profit, and only one fund suffered a loss (1/306 = 0.3%).

If you think 10 years is too long, let's shorten the time frame to 5 years. Starting from 2011, suppose you bought an equity or equity-mixed fund at the beginning of each year, held it for 5 years, and sold it at the end of the 5th year. As shown in the table below: if you bought and held for 5 years from the beginning of 2011, only 8 out of 306 sample funds lost money, meaning 97.4% of the funds made a profit; if you bought and held for 5 years from the beginning of 2012, the proportion of profitable funds was 97.8%; if you bought and held for 5 years from the beginning of 2013, the proportion of profitable funds was nearly 100%; if you bought and held for 5 years from the beginning of 2014, the proportion of profitable funds was 84.8%, and for those who bought and held for 5 years from the beginning of 2015 and 2016, the proportion of profitable funds was also above 90%.

This set of data tells us that as long as the long-term trend of the stock market is upward, most equity funds will make a profit if you invest and hold for a sufficiently long period, or in other words, the proportion of funds that lose money is very low.

Notes:

1. Data source: E Fund Internet Investment Education Base, Wind; data range from January 1, 2011, to December 31, 2020;

2. The funds counted in this table include equity funds and equity-mixed funds under the Wind second-level classification; the number of products in each time period refers to the funds of the aforementioned categories established before January 1 of the starting year.3. Among the 611 products in the period from January 1, 2016, to December 31, 2020, one product was liquidated on April 23, 2021;

4. The return rate is calculated based on the adjusted net value per share of the fund;

5. Past performance of the fund does not predict the future, investing in funds carries risks, and caution should be exercised. The short operation time of funds in our country cannot reflect the development of the securities market.