How ‘long’ is long-term when investing? Let’s find out.

Every investor defines long-term differently. But there is a definitive answer. For the purpose of calculating taxes, investments in listed stocks and equity MFs are considered long-term if the holding period is atleast one year. From an investment perspective, 3 years and above is considered long-term.

Some years ago, Fidelity Investments conducted a study in the US to find out more about this and discovered something odd – being dead could be a good investing strategy. They discovered that the highest returns were earned by investors who had just ignored their investments for years and decades. What’s more, it also turned out that many of these investors had actually died at some point. So the conclusion was that when it comes to managing your investments, the best strategy could be – to do nothing.

Value Research conducted a study few years ago. It found that on an average, if someone invested through a SIP over four years, then his/her risk of loss is negligible. For a typical fund with a multi-decade history, over all possible one year periods, the maximum returns are 160% and the minimum -57%. Over two years, this becomes 82% and -34%. Over three, 63% and -18%. Over five years, 54% and 4%, meaning never any loss. Over 10 years, the maximum is 30% and the minimum 13%. These are all annualized figures.

Why should equity investing be done only for the long-term? The answer, of course, is, to deal with volatility. Over a period of 5 or 6 years, the returns are often great but variability is high. In any given short period, one could face poor returns or even losses. The equity markets move in cycles and often it takes 5 to 7 years to go through a full cycle of a sharp rise, decline and stagnation and back. To get the right level of returns, we need to invest through the whole cycle. That won’t happen in 2 to 3 years.

Long-term is not a vague rhetorical term after all. This evidence squarely puts long-term at five years and above.

Source Credit: Based on article by Dhirendra Kumar as published by ET on Sep 14, 2018