How long should long-term be in investing?

You would have often come across advertisements suggesting that lazy vacations or travel abroad is possible through long-term investments. They might be a lucrative option for many, but most people would still be confused by what constitutes a long-term investment? Investing in order to take care of the expenses of a marriage may take 5 years, while investing for a house may take 15 years and children’s college fees can possibly take nearly 20 years. All these are examples of long-term investments of varying lengths.

The textbook definition

For taxation purposes, investments in listed stocks and equity mutual funds are considered to be long-term if the holding period is more than one year. The holding period is defined as the period from one day after the investment has been made to one day after the investment has been encashed.

The ground reality

Going by the book, any investment above one year is a long-term investment. However, this definition could be quite inadequate for practical purposes. Most investors would look at a long-term investment as a way to even out losses and maximise gains. In fact, long-term investments are preferred because they help us to ride out the investment cycles and achieve parity, if not profit.

The bottom-line

Most analysts would agree that a better definition of a long-term investment would be “An investment that has a higher probability of maximising returns over a 10-year period as compared to alternatives.”

To support this, you can draw upon some hard-hitting research on the basis of BSE data. Using this, you can also find a median which you can use a benchmark.

Before you begin, let’s take a couple of parameters into consideration-

• Growth isn’t permanent. Disruptive companies continue to create ripples until bold becomes the new normal.

• When things get worse, they usually don’t stop until they hit rock bottom. Rebounds are rare.

• All data considered are for capital aggregation investments. Income generation schemes such as bonds, debentures, etc are not as influenced by time, as by interest rates.

• FDs and other fixed return investments are not dependent on time as well, and so are ignored.

• Let us first define some popular investment return targets. Let us choose the figures for 8%, 10%, 12%, 15%, and 16.2%-the last one being average market return for last 33 years.

• The data taken into consideration uses month-end values for Sensex from April 1979 to October 2012. 

The probability of achieving these returns within a time period comes to something like this:

The six-series’ mentioned in the graph are in order of the six rates of investments that have been set as targets.

This takes into consideration some high-performing and a low-performing stock. And as can be seen from our initial premise, the investments top out around the 10-year period.

Statistically speaking, a period of more than 10 years may be considered only for academic interest as a decade is really as far as you can see.

From analysis, you can notice the following facts-

• The high-performing stocks started to peak after the 5-year mark.

• They continued an appreciable rate of growth till they crossed the 7-year threshold.

• After the 7-year threshold, they flattened out to a plateau.

• The low-performing stock, on the other hand, continued to drop steadily.

• The dip became more and more pronounced after the 7-8-year time period.

• Thus, you can take an optimum measure of the 6-7-year period as the best median in which to invest for the “long-term”.

In general, a 10-year cycle would help us to reach a plateau after which our stocks’ value would either fall or remain constant. Within this phase, it’s better to cash out in the 6-7-year period and invest in the next big thing.