We all have read in multiple articles, newspapers, books, platforms that Long term investments offer us several advantages like it gives you more compounding benefit, better post tax returns and so on but the major question arises that;
“HOW LONG IS LONG TERM??”
As been quoted ample times, that the right time to invest is NOW & the right time to redeem your investment is NEVER.
In today’s time most of us must have received forward messages on Whats app, Facebook or on other social media related to many multi-Bagger stocks Like; Investing 10,000 in Wipro in the year 1983 has become 535 Cr. Bought 20,000 shares of MRF 25 years back currently valuing around 130 Cr. All these examples clearly explain that investing for long term is mantra of Wealth Creation. Somehow, most of investors and investment advisors are member of social media group that is extremely dedicated to long term investing. However, the moment an advisor recommends a fund or advice of a particular stocks to buy, immediately there would be question from other side…. “peechle 1 saal mein kitna return diya hai”….. So, it seems to be a struggle in the group about what exactly long term investment is.
There’s an official statement by Government of India & Income Tax department for taxation purpose, that Investments in listed stocks and equity mutual funds are considered long term if the holding period is one year, similarly for Debt Funds & Real Estate the long term period is three years. But all these periods are strictly for taxation purpose and it doesn’t have any relevance for investment perspective. Especially in Equity, one year is very short period. So, still the question is unanswered; “HOW LONG IS LONG TERM??”
To get the answer, let’s get back to basics and ask the fundamental question. Why one should invest in Equity for long term. One of the main reason is avoid volatility. Longer the investment horizon lesser the volatility. (Please find table1), data of SENSEX since 1979 till Oct 2017, and we shows the probability of losing money in different time horizon. In one year of investment there is 29% probability in last 38 years investors have lost money in one year of investment horizon. And the same is reducing the moment investment horizon is increasing, and if one has invested for more than 15 years no one has lost money ever in the past.
Period Average Max Min Volatility Positive return Negative return
1 year 21% 267% -56% 36% 71% 29%
3 years 20% 83% -19% 22% 88% 12%
5 years 19% 55% -8% 20% 92% 8%
10 years 18% 35% -3% 17% 99% 1%
15 years 17% 28% 5% 15% 100% 0%
20 years 15% 22% 7% 13% 100% 0%
30 years 16% 18% 13% 12% 100% 0%
35 years 16% 17% 14% 11% 100% 0%
There’s another way of looking at the table (please refer table 1). Looking at the past data difference between Maximum return, Average return & Minimum return of SENSEX is reducing as the investment horizon increasing This proves that if one invests for more than 10 years, there is not only less probability of loosing money but also chance of getting stable return. Just to prove the point Minimum return that SENSEX has given in 30 years of time horizon is 13% CAGR which means in past if one would have invested for 30 years it has been multiplied by 34 times. Apart from this the moment investment horizon crosses beyond 10 years the average performance of market is in the range of 15% to 18% CAGR.
Hence proved that, in Equity Investment, “LONG TERM” is not a vague anymore, this can be defined as the right period of long term investment is 5 years and above.
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