In the context of investments, a tricky question to answer is what is long term?
Most answers that you would get would be three years or maybe a range of 3 to 5 years. None of these are wrong, but they are at best contextually right. What I mean is that the term of investment is also dependent on the asset class you are talking about.
Investment into real estate is probably for the real long term. Similarly, the affinity of Indians to gold is such that the term of holding actually spans generations. On the other hand, debt investments including deposits and bonds have a maturity date and mostly, the term for that investment coincides with the maturity period.
Therefore, the term of investment is most relevant while investing in equities. This is because equities are virtually perpetual. Unless the company closes down or delists its shares, there is no end date on equity shares. Whether you choose to hold them for a day or for decades, they will be there for you. The choice is yours.
According to me, long term investing is a concept rather than a number. What long term investing denotes is the quest for owning a part of a business and the intent to grow along with it, rather than owning scraps of paper without a clue of the underlying value, in the hope of selling them at a higher price to someone even more ignorant.
Markets can be extremely volatile in day-to-day terms. Whether they will be up or down tomorrow is impossible to say based on events that have happened today. Even in the medium term of a few months and a couple of years, markets may show trends that may be favourable or not, without any apparent reason.
Benjamin Graham, who is called the father of investing and who taught the legendary investor of our times, Warren Buffet once said: “In the short run market is a voting machine, but in the long run, it is a weighing machine”. What this means is that in the short term, markets may be swayed by sentiment, but in the longer term, they evaluate each business closely and value it appropriately.
Therefore, accounting for volatility and shorter-term trends in the markets, one should have in mind a minimum holding period when investing into equities. This can be 3 years or 5 years but the longer it is, the better the results will be. If you have ever sold your equity investments in a hurry during a crash, it means you either had too much of them in your portfolio or did not have the right mindset to ride through difficult times.
I would strongly suggest you hold on to equity investments as long as you can. To give you some specifics, the BSE Sensex was set up as the first index to monitor the Indian stock markets, in the year 1979. As with any other index, the selected 30 companies were collectively rebased to a value of 100 and we started from there. Today, 42 years down the line, the Index is at around 52,500. That is 525 times the initial value or a compounded return of 16 per cent per annum for this period.
While the markets today are hitting new highs and there is worry all around, if you have allocated to equities properly and are confident of your investments, either directly or through a money manager, there is no cause for worry. Even if your equity investments go down from here, over the years they will come up again and reward you handsomely.
(The author is the founder of Five Rivers Portfolio Managers and can be reached at pankaj@5riversindia.com)