THE 5-YEAR-OLD VERSION
Risk is not only "will I lose money". It is "how wide is the range of things that could happen". A calm pond and a wavy sea might both get you across, but in the sea you must be able to stay in the boat when the waves come.
One year at a time
Here is every calendar year of the Nifty 50's price return since 2008:
Notice there is no "typical" year. The average hides a spread from minus 52% to plus 76%. That spread is what we call volatility: how much and how fast the price moves.
Most days are quiet, a few are wild
- On 71% of trading days the Nifty 50 moved less than 1% either way.
- The index fell on 47% of days. Even in rising markets almost half the days are down days.
- Only 43 days in 18 years moved more than 5%, and most of them came in two bursts: 2008 and 2020.
- The worst day was -13.0% on 23 Mar 2020. The best was +17.7% on 18 May 2009.
Big moves cluster together. Calm periods are long, and then a storm arrives quickly.
Time narrows the range
The same data, but looking at how an investor who held for a longer stretch would have fared (every possible start date, annualised price returns):
| Holding period | Worst outcome | Best outcome | Share of start dates that lost money |
|---|---|---|---|
| 1 year | -56% | +99% | 20% |
| 5 years | -2.3% a year | +24.8% a year | 1.4% |
| 10 years | +3.8% a year | +15.8% a year | 0% |
Be careful with this table
It covers only one market and 18 years, and it starts just before the 2008 peak. Narrowing with time is a pattern in this data, not a guarantee. A longer horizon makes losses less likely, never impossible.