Wow! what a question? A great investor dilemma as always.
I will try to address that mental conflict through my own understanding and experiences.
(A). Undoubtedly equity class generate much better return than debt over a long period of time say 15 to 20 years onward. This is the motherhood statement and can’t be challenged so easily in all probability.
But let us deep dive more to extract the real weaknesses.
a) For an equity investment I mean direct stock investment, a beginner had almost around 10,000 companies to chose and invest whereas for a beginner to invest in Debt instrument he has 8-10 options available except debt funds. (Please note that IMO Debt funds are more riskier than equities.)
b) Now the probability that beginner is able to choose good stocks I mean consistent compounder or multi-bagger or real growth companies from the basket of 10,000 companies is remotely small and in my experience would be less than 10%. So chances that a beginner will spoil his capital is very high and make losses 90% of the time. And by the time he realizes this he would have wasted 7 to 10 years of his precious investing time which would have significantly dented his long term annualized return.
His long term compounding return including his follies would be in the range of 1 to 5% which will put his head in permanent regret and remorse. And then in order to compensate his loss/return he would take bigger risks inviting more troubles for himself. Therefore you would have heard that bulls make money, bears make money but pigs get slaughtered. And the majority of Retail investors fall into the category of pigs as far as stock returns are concerned.
Anecdotal story for reference: Once upon a time during early years of 2000’s the stocks like ONGC was such a hot potato with great business and excellent dividend yield that it had attracted Buffet to make investment in India when GOI brought IPO and further FPO, OFS blah blah. And later as on today ONGC turned out to be a great wealth destroyer of all time having experienced it first hand :). My investment in ONGC was six times of annual fresher salary of that time! I am amazed to see how many fund houses still holding such laggards at the expense of hard earned money of innocent investors.
- c) Now lets take a scenario a beginner makes a choice of Debt investment like PPF then in 8 to 10 years he would have made consistent return of 7-8% plus tax saving of 30% if falls under high tax bracket. And his capital would have swollen at least two times without any iota of risk.
So for me a beginner must start with Debt allocation before jumping or graduating to equity. For equity investment one need to develop sound study habits, deeper research and significant time able to invest in reading, researching, analyzing various stocks, sectors and general economy.
(B). Personally for me Debt allocation is important because I foresee my key expenditure of large amount in coming years of 3, 5, 7 years so I can’t take unnecessary risks of putting those sums in equity. So it all depends upon individual situation, risk profile, need and financial goals. If you don’t need money back from equity for say next 40 years than surely one can put all his money in equity. But the big question is where (which stocks or basket of stocks) to put money in equities for such a long term?
I am sharing my understanding, learning and experiences and I have every right to be proven wrong. But one thing I realized that equity investing is not that plain vanilla exercise that any Tom, Dick and Harry can do and make fortune out of it in quick succession as propounded by govt., media and its agents. It’s a tough and very complicated exercise for novice and beginners. I advise extreme caution to beginners in direct stock investment without proper and systematic study.
Hope this helps. Happy investing.