By Dhirendra Kumar
When you listen to a lot of investors— as I’ve been doing in various online fora during the lockdown—you come across some unanswerable questions time and again. One of these is for how long should I invest. Often, I feel the question is actually asked out of habit that grows from the dominant tradition of fixed income investing in India. When you go to a bank to make a fixed deposit, then the only decision to be made is the period of the deposit. So asking and getting an answer to the question of the investment period is about the only thinking needed.
The same question is harder to ask and harder to answer in equities or equity mutual funds. For how long should you invest? In one sense, the answer depends entirely on the person asking the question. For how long can you spare this money? Invest it for as long as you can.
In reality, for equities, the real question to ask is from the other end. That is, what is the minimum period for which one should invest in equities. If you have money to spare for a month, or a year, or even three years, then equities are not the vehicle. Equities are for long-term investing only. So what is this long-term? How long is it?
For the right answer, let’s get back to the basics and ask the fundamental question that I’ve answered earlier in this column: Why should equity investing be done only for the long-term? The answer, of course, is to deal with volatility. Over a period like five or six years, the returns are often great, but the variability is high. In any given short period, you could face poor returns, or even losses. There’s another way to look at it. The equity markets move in cycles, and often, it takes five to seven years to go through a full cycle of a sharp rise, decline and stagnation and back. To get the right level of returns, we need to invest through the whole cycle. That won’t happen in a year or even two.
These last few months have been a great reminder of how extreme events are a part and parcel of equity investing. Long periods of drift can make one complacent against large and sudden drops.
Old readers of my articles would notice that over the years, I have extended the period that I would call long-term. Once upon a long time ago, I would say that if you are investing for more than three years then equities were fine. Then, I gradually shifted that to five years and now five to seven years. Why is this? A friend of mine suggested that it’s just that I’m getting older. Maybe he is right, at least a little bit. Maybe there is a hidden instinct for conservatism that slowly surfaces as one gets older.
However, the circumstances of equity investing have also changed. Since 2007, ultra-large and sudden shocks have attained a different scale and universality. Naturally, one has to take a longer, harder look at what used to be reasonable assumptions earlier. It sounds like I’m changing what should be a permanent principle, but as the great economist John Maynard Keynes said, “When the facts change, I change my mind – what do you do, sir?â€
Recently, this fact came home to me quite strongly when I was experimenting with the investment algorithms on which the portfolio advisory tool of the forthcoming Value Research Premium service is based. In all honesty, given the economic and business environment in the world today, investors should not go 100% equity for investment horizons of less than seven years. This is not an absolute principle. It’s not as if you’re going to face certain ruin if you do that. It’s just that the chances of losing a part of your gains are somewhat higher. If you’re young and have a good income, go ahead by all means.
Being aggressive or conservative in investments is not about black or white, but shades of grey. It depends as much on you personally as on external circumstances.
(The author is CEO, Value Research)
