If you ask several people what long-term investing meant to them, you might get different answers. Some may say 10 to 20 years, while others may consider five years to be a long-term investment. Individuals might have a shorter concept of long term, while institutions may recognize long term to mean a time far out in the future. This variation in interpretations can lead to variable investment styles.
For investors in the stock market, it is a general rule to assume that long-term assets should not be needed in the three- to five-year range. This provides a cushion of time to allow for markets to carry through their normal cycles.
However, what’s even more important than how you define long term is how you design the strategy you use to make long-term investments. This means deciding between Long Term and Extremely Long Term management.
Long-Term Strategies
Investors have different styles of investing, but they can basically be divided into two camps: Long Term management and Extremely Long Term management. Buy-and-hold strategies - in which the investor may use an Long Term strategy to select securities or funds and hold them for the period of Five to Eight year while Extremely Long Term strategy defines the period of Ten to Eleven years. Below table clearly shows that extremely long term strategy would be extremely profitable as compared to Long term strategy.
|
Relcapital
|
|
Year
|
Month
|
Price
|
Yearly Return%
|
Two Year Return%
|
Five Year Return%
|
Ten Year Return%
|
Thirteen Year Return%
|
|
1997
|
Jan
|
57
|
12.28
|
-33.33
|
-7.02
|
987.72
|
894.74*
|
|
1998
|
64
|
|
1999
|
38
|
|
|
2000
|
123
|
|
|
|
2001
|
93
|
|
|
|
2002
|
53
|
|
|
|
2003
|
58
|
|
|
|
|
2004
|
136
|
|
|
|
|
2005
|
104
|
|
|
|
|
2006
|
405
|
|
|
|
|
2007
|
620
|
|
|
|
|
2008
|
2614
|
|
|
|
|
|
2009
|
567
|
|
|
|
|
* Bonus and stock splits are not calculated in this table
As shown in the above table Reliance Capital gave a negative return of 7% as in case of long term strategy while same script gave almost 987% in Extremely Long Term strategy and some where around 5000% return in 11 years.
|
Unitech
|
|
Year
|
Month
|
Price
|
Yearly Return%
|
Two Year Return%
|
Five Year Return%
|
Eight Year Return%
|
Ten Year Return%
|
Eleven Year Return%
|
|
1998
|
Jan
|
45
|
0.00
|
-2.22
|
-4.44
|
31340.00
|
988.89*
|
-8.89*
|
|
1999
|
45
|
|
2000
|
44
|
|
|
2001
|
38
|
|
|
|
2002
|
42
|
|
|
|
2003
|
43
|
|
|
|
2004
|
122
|
|
|
|
|
2005
|
335
|
|
|
|
|
2006
|
Jun
|
14148
|
|
|
|
|
2007
|
Jan
|
464
|
|
|
|
|
|
2008
|
490
|
|
|
|
|
|
2009
|
41
|
|
|
|
|
|
* Bonus and stock splits are not calculated in this table
While Unitech gave a negative return of 4.5% in Long Term strategy as compared to 31340% in Eight year and a return of 988% in Extremely Long term strategy. In these returns we have not calculated bonus, dividends and stock split prices. Also when you invest in stock market for more than one year in particular scripts you would get Tax benefit.
Here EquityPandit.com shows some compelling data to convince investors to stay in for the extremely long run.
Active Management
One of the most important aspects of the investment is Active Management. It’s a bit difficult to understand the meaning of this term. But active management means you should actively manage your portfolio in such a manner that you should gain in a secure manner. That means there are so many risks involved when you have invested it for long term. Like just think the investor who had invested in Year 2007 his value is almost half or may be lower than that. But here the point is you should be very patient as you all know the recession we faced in year 2008 when most of us lost our hope & most investor sold their shares and booked huge loss. Mr. Warren Buffet the great investor guru predicted green shoot in the coming year & he starts buying & also holding the shares which he had. Just see the results of that he gained the biggest amount in Equity than any other Hedge fund in the world. So the conclusion is be patient, diversified your portfolio so you won’t suffer much in case of Satyam saga.
Timing
When it comes to market timing, there are many people for it and many people against it. The biggest proponents of market timing are the companies that claim to be able to successfully time the market. However, while there are firms that have proved to be successful at timing the market, they tend to move in and out of the spotlight. This is very much clear from above tables. What this data suggests that timing the market successfully is very difficult because returns are often concentrated in very short time frames. Also, if you haven’t invested in the market on its top days, it can ruin your returns because a large portion of gains for the entire year might occur in one day. Means say we have two investors. One who invested in Unitech in year 1998 he may have fed up in 2003 when there was no movement in the script. Possibly he may booked loss or still he believe in his decision and stayed invested he gained almost 31000% in next three year but that’s a extremely difficult to take a call whether he remain invested or not. But we have second investor who continuously study the market condition, who keep the script record including it’s financial performance & when he got clues of bull condition he bought the script In year 2003. He got the same return in small time span what first investor got within a big time span. So you should be in continues touch with the market, Economy & in the script in which you have invested.
Conclusion
If volatility and investors’ emotions were removed completely from the investment process, it is clear that passive, long-term (8 years or more) investing without any attempts to time the market would be the superior choice. In reality, however, just like with a garden, a portfolio can be refined without compromising its passive nature. Historically, there have been some obvious dramatic turns in the markets that have provided opportunities for investors to cash in or buy in. Taking cues from large updrafts and downdrafts, one could have significantly increased overall returns, and as with all opportunities in the past.