All of us know that equity investment is for the long term, right? As an overall philosophical postulate I find nothing wrong with that statement. The issue is when we try to apply it rigidly without understanding the implications.
First things first – what really is long term? For a person starting his/her investments at 25, long term can easily be seen as 25 years or more. For another person who is 40, long term would probably not be more than 15 years. In general though, most people would agree that a time frame of 15 years or more can be safely taken as long term. Now, if we are saying that equity investments are for the long term, then does it follow that you should not invest in equity if your time horizon is less?
Let us take a little closer look at the actual stock market returns over the last 15 years to understand this better. The following observations will be of interest:-
- Any rolling period of 5 years or more has never given negative returns. The number of such periods is 11.
- For the 13 rolling return observations of 3 years or more, only 2 have given negative returns.
- Average return over 5 year periods is the highest at 17%, for higher periods it ranges between 13 and 16%.
- Maximum return is the highest for 1 year period at 51% and lowest over 15 year period at 13%.
- Standard deviation is 0 at 15 years and 24 at 1 year.
How do we interpret these observations? Well, for one it does demonstrate what I have said in several of my posts. Returns from equity are non-linear in nature and hence not really time dependent. You may well get great returns in 2 years and fairly mediocre returns over 5 years. Yes, with longer term the risk does reduce as shown by the standard deviation. But even from this data of last 15 years, it is easy to see that investing in equity can be worthwhile for the shorter time frames too.
So how should you really invest in equity. I have discussed in detail about the 3 portfolio model in my earlier posts, interested readers should make an effort to search for the posts in my blog. But here is what you should essentially do:-
- Decide on your asset allocation between debt and equity. For the most part, debt can be taken care of through your PF and PPF only, no need to complicate it further.
- Invest in MF so as to cover all your goals. Retirement will be partly funded by debt investments in PF and PPF.
- All other amounts you can invest should be put in stocks.
- Make sure that you do not have to sell from your MF or stocks portfolio in bad times for the market. Your PPF account balance should therefore cover all immediate goals. If the account balance is not adequate add other debt products.
This is all that you need to really do – there is no need to worry about the long term or short term for investing. When there is need for money, you can decide on redemption strategy based on how your 3 portfolios are doing. You just need to maintain your overall asset allocation and just keep investing regularly.
I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.
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