How Long should Long Term Investments be?

Equities as an asset class is generally looked up on as something that is way too risky, and holds chances of you losing your money. Some people look at equity like gambling. The wild market swings are making them uncomfortable about the returns they may earn along with the risk of losing their money.

But the question is why should the investors panic in these short term market swings when they know that equity investments should be planned for long term? Generally it is seen that the investment objective of equity funds states that they are meant for 'long term' capital appreciation.

The answer is the dilemma faced by investors to sort out - How long really is the "long term"?

We ran a calculation of the S&P BSE SENSEX values starting from its launch year till date (31st December, 1979 – 29th November, 2013), here is what the numbers look like.

*Data Source: Sensex values from Bloomberg & data compilation by Quantum AMC

Past performance may or may not sustain in future

Understanding the table of long term investment return:

As per the table if one had invested for 1 year from 1st January, 1980 to 31st December, 1980 and continued such 1 year period investment for the next 33 years by investing on 1st Jan every year and redeeming on 31st December, of that year; every year during the 34 years’ time frame sensex gave negative returns 9 times. Similarly you can read for 3years, 5 years and so on. However, if investment had been for 10 year i.e. from 1st January, 1980 to 31st December, 1989 and continued such investment every year for 10 year period, according to the table sensex did not give any negative returns.

Moreover when it comes to equities, to stay invested for 20-25 years in equities might be unthinkable for some at the first instant, it is quite a practical period if you consider early planning for goals like retirement, child’s education & marriage etc. In fact those who start planning from the time they start earning would have a good 20-35 year period to accumulate for these goals before they begin to pull out from investments.

The biggest mistake investors make is to halt investments in equities when stock markets are falling and withdraw whatever corpus has been created as soon as stock markets seem to have recovered. To tackle this tendency one needs to link investments to goals and not to stock market levels. While it is very important to balance out your portfolio and spread your investments across asset classes, one can look at Debt and gold as an asset class to park their investments.

Therefore, if you have future financial goals like planning for retirement, child’s education, their marriage etc., you can have some exposure to equities and have a long term horizon while investing and not exiting from your investments abruptly to book quick profits in the stock market. Moreover you should consult your financial advisor to guide with your investment needs.

Statutory Details and Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.