How Long is Long Term Investment in Equity?

How Long is Long Term Investment -image

Experts always advice us to invest and stay invested for long term. But how long is long term investment?

In long term investment how many years can be considered as enough?

In terms of Government of India rules for equity investment:

  • When holding period is less than 12 months…

…short term capital gain (STCG) tax is applicable.

Similarly,

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  • When holding period of equity is more than 12 months…

….long term capital gain (LTCG) tax is applicable.

Does this mean that long term investment means holding period of more than 12 months?

Unfortunately, this is not the case.

In fact in true sense, there is no real definition of long term investment holding time.

It may vary from person to person.

But this does not mean that, we cannot establish one for self.

This article has been written just for this purpose.

We will try to answer this question with some mathematical figures.

It will answer, how long is long term investment for “You“?

As I said, it may vary from person to person.

A case may also arise where, a particular investment may demand a holding time of minimum 3 years, while others may demand more than 3.

Lets read about this topic in more detail….

#1. Money multiplies faster in later years…

Generally speaking, holding period of less than 3 years in equity is considered as short term investment.

We have always heard that equity investment is best when invested for long term.

But no body says that, in long term investment how many years can be considered as enough.

But first lets understand why experts prefer long term investment.

In addition to other reasons, its the power of compounding that makes long term investment so adorable.

Its easier to understand power of compounding taking example of risk free investing.

Risk free options gives assured growth rate.

In the below table and chart we can see how fast money multiplies in later years.

This is specifically true after the 7th year (when invested money is earning higher returns).

How Long is Long Term Investment -1

Faster money multiplication is not the only reason why long term investment is preferable.

In terms of equity investing, short term returns are not predictable.

There is too much volatility in stock prices.

In order to gain a clearer view of price movements of stocks, it is essential to view its behaviour in long term.

In long term, a fundamentally strong stocks will certainly exhibit a upward price trend.

Fundamentally strong stocks takes extra care to maintain its competitiveness in the market.

In order to remain competitive companies expand and modernise its existing facilities.

It takes time to execute modernisation and expansion plans.

As a rule of thumb, such projects takes a minimum of 5-6 years to start showing its positive effects.

See the below table to understand how fast the money multiplies with time and rare of return.

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Click to Enlarge

#2. How long is long term investment?

When it comes to equity investing long term holding of over 5-6 years is essential.

But how we arrived at this conclusion?

Lets see some data related to this point…

In equity investing, long term holding provides three advantages:

  1. Assures certainty of return.
  2. Promises higher returns.
  3. It allows power of compounding to take effect.

Equity investing is plagued with uncertain returns in short term.

Long term holding is a tool that can convert uncertainty into surety.

The longer is the holding time, more predictable are the returns of equity.

So, in long term equity investment how many years of holding time is enough’?

To answer this question, we have prepared a small report.

We would like to share it in this article.

In this report we tried to figure out that how long term investment increases the certainty of returns.

In our study we assumed that the investors are carrying a well diversified portfolio.

A perfect example of a well diversified equity portfolio is an index fund.

#2.1 Holding Time of 1 Year?

In equity investing, holding time of 1 year is considered too short, why?

Look and the below chart and you will know why.

High price volatility is generally observed in equity, in short term.

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What does the above Sensex chart tells us?

In span of 1 year, the Sensex behaves as following:

  • Sensex opens with 26,000 point on Jan’16.
  • Then it falls to 23,000 points by Mar’16 (-11.54% from point of purchase).
  • Sensex again climbs, and touches 29,000 points by Sep’16 (+11.5% from point of purchase).
  • Then it again falls back to below 26,000 points by Nov’16.
  • Climbs to 28,000 points by Jan’17 (+7.69%from point to purchase).

Note the quantum of price rise and fall in span of 12 months. Isn’t it alarming?

Sure it is, but this is the way equity behaves in short term.

The person who bought Sensex on Jan’16 had following possibilities of loss-making in one year:

  1. Between Jan’16-Mar’16 (3 months), if the investor had redeemed, he would have made a loss.
  2. Between Nov’16-Dec’16 (2 months), if the investor had redeemed, he would have probably made a loss.

What does it mean?

In a period between 2016 and 2017, Indian stock market has performed very well.

But still an investor would have 5 such months (41.67%) where he would have made a loss.

This is one clear evidence that says why 1 year of holding time is not sufficient for equity.

One year is not sufficient to allow equity investing to show its benefits.

Compare this with risk-free investment option where average return is 7% per annum. Probability of loss in risk-free investing is almost zero.

Hence to earn a return of +7.69% (as per above chart), is it worth taking the risk?

In equity investment our target shall be minimise the risk of loss.

But we will not like to do this by compromising returns.

So my advice will be increase the holding time.

One year holding period is too risky for equity investing, as probability of loss is too high.

#2.2 Holding Time of 3 Years?

The data for 3 years holding time is very interesting.

I have gathered a data of last 10 years for Sensex. I have grouped the data as below:

  • 1-Group : Mar’08 to Feb’11 (36 months).
  • 2-Group : Mar’11 to Feb’14 (36 months).
  • 3-Group : Mar’14 to Feb’17 (36 months).

Lets see how an investor would have fared had he/she entered and held their investment for these 3 year (36 months) periods:

Group 1 : Mar’08 to Feb’11 (36 months)
  • Mar’08 – Sensex was @15,644 level
  • Feb’11 – Sensex was @17,823 level
  • Gain in 3 years – 4.44% (CAGR).

[Note: Between this period (2008-09), the world saw one of its worst stock market crash].

The person who bought Sensex on Mar’08 had following possibilities of loss-making in 3 years:

  1. Between Mar’08-Jun’09, if the investor had redeemed, he would have made a loss.

What does it mean?

In a period between Mar’08 and Feb’11, Indian stock market saw one of its biggest crash.

Hence, the investor would have faced 13 such months (36%) where he would have made a loss.

But eventually, by the end of 36th month, he would have seen a profit of 4.44%.

Was it worth a wait? earning 4.44% in 3 years?

Bank’s FD would have given better returns, right?

How Long is Long Term Investment -4

Group 2 : Mar’11 to Feb’14 (36 months)
  • Mar’11 – Sensex was @19,445 level
  • Feb’14 – Sensex was @21,120 level
  • Gain in 3 years – 2.79% (CAGR).

[Note: Between this period (2011-14), Indian under UPA rule, was plagued with policy paralysis. It would not be wrong to say that, for India, this phase was worse than the period of stock market crash].

The person who bought Sensex on Mar’11 had following possibilities of loss-making in 3 years:

  • Between Mar’11-Dec’12 (21 months):

If the investor had redeemed, he would have made a loss.

  • Between Feb’13-Mar’13 (2 months):

If the investor had redeemed, he would have made a loss.

  • Between June’13-Sep’13 (4 months):

If the investor had redeemed, he would have made a loss.

What does it mean?

An investor would have faced 27 such months (75%) where he would have made a loss.

But eventually, by the end of 36th month, he would have seen a profit of 2.79%.

Was it worth a wait? earning 2.79% in 3 years?

Bank’s FD would have given better returns, right?

How Long is Long Term Investment -5

Group 3 : Mar’14 to Feb’17 (36 months)
  • Mar’14 – Sensex was @22,386 level
  • Feb’17 – Sensex was @28,743 level
  • Gain in 3 years – 8.69%.

[Note: Between this period (2014-15), Indian was under NDA (BJP) rule. Stock market has performed remarkably under NDA’s rule. The mood in stock market was most buoyant].

The person who bought Sensex on Mar’14 had following possibilities of loss-making in 3 years:

  1. Between Mar’14-Feb’17 (36 months), if the investor had redeemed, he would have not made a loss in any single month.

What does it mean?

An investor would have faced Zero such months (0%) where he would have made a loss.

To top it all, by the end of 36th month, he would have seen a profit of 8.69% (CAGR).

But again the question that needs to be asked is, was it worth a wait? earning 8.69% in 3 years?

Considering that we are considering returns of Sensex (which is a basked for 30 stocks), 8.69% is a decent return. Neither too good nor too bad.

How Long is Long Term Investment -6

#2.3 Holding Time of 5 Years?

The data for 5 years holding time is worth watching.

This data will give a real picture of a possible correct holding time.

I have gathered a data of last 15 years for Sensex. I have grouped the data as below:

  • A-Group : Mar’03 to Feb’08 (60 months).
  • B-Group : Mar’08 to Feb’13 (60 months).
  • C-Group : Mar’13 to Feb’18 (60 months).

Lets see how an investor would have fared had he/she entered and held their investment for these 5 year (60 months) periods:

Group A : Mar’03 to Feb’08 (60 months)
  • Mar’03 – Sensex was @3,048 level
  • Feb’08 – Sensex was @17,578 level
  • Gain in 5 years – 41.96% (CAGR).

[Note: Mar’03 was that point in time when stock market has bottomed after the famous dot com crash of 2001-02. Similarly, Feb’08 was that time in stock market where it was at its peak (just before the 20008 market crash].

The person who bought Sensex on Mar’03 had following possibilities of loss-making in 5 years:

  1. Between Mar’03-Apr’03 (1 month), if the investor had redeemed, he would have made a loss.

What does it mean?

In a period between Mar’03 and Feb’08, Indian stock market saw one of its biggest crash.

Hence, the investor would have faced only 1 such month (1.67%) where he would have made a loss.

By the end of 60th month, he would have seen a profit of a whopping 41.96%.

Caution: Such level of profits from stock market is of rarest of rare kind.

Group B : Mar’08 to Feb’13 (60 months)
  • Mar’08 – Sensex was @15,644 level
  • Feb’13 – Sensex was @18,861 level
  • Gain in 5 years – 3.81% (CAGR).
  • Gain (Mar’09 & Feb’13, 4 years) – 18% (CAGR).

[Note: Mar’08 was that moment in time where stock market was almost trading at its peak levels. Soon after this, Indian stock market saw one of its biggest crash’s of all times].

The person who bought Sensex on Mar’08 had following possibilities of loss-making in 5 years:

  1. Between Jun’08-Jun’09 (13 months), if the investor had redeemed, he would have made a loss.
  2. In Dec’11 (1 month), if the investor had redeemed, he would have made a loss.

What does it mean?

An investor would have faced 14 such months (23%) where he would have made a loss.

By the end of 36th month, he would have seen a profit of 3.81%.

Had he entered the market in Mar’09 (and not in Mar’08), and held his investment for 4 years, his returns would have been 18% CAGR.

Was it worth a wait? earning 3.81% in 5 years? Not really.

This is where timing the market becomes so important (earning 18% was possible if the investor could avoid the peak of Mar’08).

Avoiding peaks, and staying invested for 5 years can give great returns.

How Long is Long Term Investment -7

Group C : Mar’13 to Feb’18 (60 months)
  • Mar’13 – Sensex was @18,835 level
  • Feb’18 – Sensex is @34,142 level
  • Gain in 5 years – 12.63% (CAGR).

The person who bought Sensex on Mar’13 had following possibilities of loss-making in 5 years:

  1. Between Mar’13-Feb’18 (60 months), if the investor had redeemed, he would have not made a loss in any single month.

What does it mean?

An investor would have faced zero months (0%) where he would have made a loss.

By the end of 60th month, he would have seen a profit of 12.63%.

Was it worth a wait? earning 12.63% in 5 years?

Considering that we are considering returns of Sensex (which is a basked for 30 stocks), 12.63% is a good return in long term.

How Long is Long Term Investment -8

#2.4 Holding Time of 7 Years?

The data for 7 years holding time is also worth noting.

Probably this is kind of holding time we would like to endorse for equity investments.

I have gathered a data of last 11 years for Sensex. I have grouped the data as below:

  • Group 1A : Mar’03 to Feb’10 (84 months).
  • Group 2A: Mar’11 to Feb’18 (84 months).

Lets see how an investor would have fared had he/she entered and held their investment for these 7 year (84 months) periods:

Group 1A : Mar’03 to Feb’10 (84 months)
  • Mar’03 – Sensex was @3,048 level
  • Feb’10 – Sensex was @16,429 level
  • Gain in 7 years – 27.2% (CAGR).

The person who bought Sensex on Mar’03 had following possibilities of loss-making in 7 years:

  1. Between Mar’03-Feb’10 (84 months), if the investor had redeemed, he would have not made a loss in any single month.

What does it mean?

An investor would have faced zero months (0%) where he would have made a loss.

By the end of 84th month, he would have seen a return of 27.2% p.a..

Was it worth a wait? earning 27.2% in 7 years?

It could not have been better.

How Long is Long Term Investment -9

Group 2A : Mar’11 to Feb’18 (84 months)
  • Mar’11 – Sensex was @19,445 level
  • Feb’18 – Sensex is @34,142 level
  • Gain in 7 years – 8.37% (CAGR).

The person who bought Sensex on Mar’11 had following possibilities of loss-making in 7 years:

  • Between Apr’11-Dec’12 (21 months):

If the investor had redeemed, he would have made a loss.

  • Between Feb’13-Mar’12 (2 months):

If the investor had redeemed, he would have made a loss .

  • Between Jun’13-Sep’12 (4 months):

If the investor had redeemed, he would have made a loss .

What does it mean?

An investor would have faced 27 months (out of 84 months – 45%) where he would have made a loss.

[Note: see the below chart. Loss making months of 27 months are all in the initial months of the investment. In later part of investment holding time, Sensex was only climbing higher]

By the end of 84th month, he would have seen a return of 8.37% p.a..

Was it worth a wait? earning 8.37% in 7 years?

Considering that we are considering returns of Sensex (which is a basked for 30 stocks), 8.37% is a good return in long term.

How Long is Long Term Investment -10

Conclusion…

To answer our famous question of How long is long term investment, we can now conclude the following:

The longer we hold the better.

The numbers show the following conclusion:

(1) One year holding time is too risky (41.67% chance of making loss).

(2) Three year holding time is also too risky (37% chance of making loss).

(3) Five to Seven year holding time can be considered ideal.

Here there is only 12% chance of making loss.

There was high probability of earning returns above 15% p.a. when holding time is 5 years or higher.


Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

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