How do you define long-term?

We often come across experts suggesting to go for a long-term investment. However, what is this long-term? Read on to find out why long-term is considered more than 10 years.  

One thing that many investors hear is that investing in equity should be for the long term. Nevertheless, there is no clarity on how much time period should be specifically called a ‘long-term’. Hardly will you find any place where it is quantified. As far as the Income Tax Department of India is concerned, for the calculation of capital gains tax, whether invested in equity or equity-dedicated mutual fund, long-term means anything which is more than one year. In the case of other investments, it is three years and more. However, if we see from the investment perspective, then one year is a very short period for investments in equity. 

Before going into detail and defining what is long-term, let us first understand why people suggest going for long-term? The long term can roughly be defined as that period when you can expect returns from the asset classes with reasonable certainty. The longer the period of investment in equity, the lesser is the volatility. On the other hand, a shorter period has higher volatility, which might also lead to a capital loss. The best example took place last year (2020) when within a span of two months, the equity market lost almost 40 per cent of its value.   

The stock market runs in cycles. It takes around five to seven years to go through a cycle of growth, stagnation, fall, and trough. To get an expected return, the investments must be held for the entire cycle. 

To understand this, let's assume investment in Sensex. The rolling return in Sensex from 1979 to 2019 is shown in the table below:  

This means there seems to be no loss for investments made in Sensex if you had invested in any 15 years starting 1979. 

Now, it is clear that the shorter the period, the greater the potential gain but then, the greater is the possible risk of losing your capital. On the contrary, the longer the period, potential returns are stable and the lesser is the volatility in returns. Therefore, next time, if anyone suggests investing for a long term in equity, always consider it as greater than 10 years.