How Long is Long Term for investing in Equity?

Equity and Long Term go hand in hand. Whenever you hear or read about investing in Equity, the concept of long term follows. That we should invest in Equity for Long Term, because Equity is risky in the short term.

But what exactly is this long term? How long is long term for Equity investing?

For tax calculation, any equity investment which is held for more than a year becomes a long term investment. But practically, investing in equity with a one year investment horizon is totally absurd. One year is a very short holding period for Equity investments.

Over the short term, equities are volatile, there are times when stocks have even doubled overnight, but there are also times when stocks have fallen by half over a night. So, the principle of long term stands to negate the volatility associated with equity over short periods.

The following is the BSE sensitivity table, it shows the returns from the Sensex for different investment periods from March 1979 until March 2018.

This table explains what we narrated above, as we see over short periods, both the maximum as well as the minimum returns are on the extreme, but as we move towards longer periods, the returns are stabilizing and the gap between the maximum and the minimum is alleviating. In shorter investing periods, the probability of making losses is quite high, but as the horizon increases the probability of loss significantly decreases and eventually becomes 0. So, an Equity investor in order to get desired returns and maintain enough distance from the the risk arising out of the volatility, must have a holding period where the probability of loss is low or Nil.

So, coming back to the main question, how long is long term?

The longer the better. There is no ceiling to the term long term, the more time you give to your investment, the less prone is your investment to risk and compounding works to generate superior wealth for you. Quite often we come across anecdotes where people totally forgot about their share certificates and made humongous wealth when they eventually sold their investments. In some cases, the investor died and his family got enough money to sustain a lifetime from his Equity investments which he made decades back. There is a popular equity investing strategy which is called 'being dead', that is invest and then forget about it.

Holding an investment perpetually can generate breathtaking returns and create spectacular wealth for you, but may not be practical. You have your needs, you have your goals to be fulfilled, which is why you invested in the first place. Equity markets grow in cycles, there is surge, then there is a steep correction before the markets eventually stabilize. To neutralize the risk in the investment, the holding period must cover all the phases of a cycle, which is generally between 5-10 years.

Generally Indian investors do invest for long periods of time, but mostly in traditional investment instruments. Investors invest in traditional tax saving instruments like PPF and then maintain their cool till the PPF's maturity, which is 15 years. But when it comes to Equity, they will keep checking the prices/NAV's, get tensed when their investments fall or get excited when they are making profits, and eventually end up selling their investments to avoid losses or to book gains. If the investor gives the same amount of time to his ELSS investment as he gives to his PPF, and simply forget about the investment as he does in case of his PPF, he will be amazed by the amount of wealth he could create by being invested in Equity.

Following is a snapshot of the value of Rs 1 Lac invested in PPF and in an ELSS scheme for 15 years.

An investor who invested in an ELSS scheme 15 years back would have made 4.5 times more wealth than an investor who invested in a PPF at the same time. And such superior returns are witnessed in all kinds of equity schemes over long periods, be it diversified schemes, large cap schemes, mid or small cap schemes, thematic schemes, etc. So, like you give time to your other investments like PPF's, or gold or property, if you maintain the same amount of patience in case of your Equity investments also, some of your greatest blessings will come with these investments.

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