How long is long term

Retail investors are frequently told they must look at the long term when buying stocks or mutual funds. But how long is long term? Someone who, say, bought an index fund when the Sensex was at 15,896.28 at October end 2009 stood to gain a bit at the beginning of this November (see box), when the Sensex was at 17,480.83. But someone who held on to his index fund from November 2007 when the Sensex was at 19,724.35 is still a loser, despite double his patience of four years.

Of course, there are boom and bust cycles in the stock market. But, increasingly, investments in stocks ask for active involvement on a continuous basis, say some of the country's leading brokers.

Long term usually means three years, sometimes longer, but this thinking no longer works, said Mr. Motilal Oswal, Head of Motilal Oswal Financial Services. “It is all about selecting the right stock and the right sector. In a bad market, it is all about stock selection.”

Paying for advice

Ms Deena Mehta, Managing Director of Asit C Mehta Investment Intermediates, says that it is a fallacy to look at the last four years selectively and say that long-term investment has not worked for many people. “In between the market has gone up, if you notice. People have to be continuously engaged with the market, which goes through its cycles of increase and decline.”

She said the problem in India is that people, if they are to continuously be engaged, need advice, but are not willing to pay for it. “Investors feel that transaction costs should include everything. But transaction and advisory services are different. And nobody pays for advisory services in India.”

There has been an alternating four-to-five cycle of ups and downs in the market for the last three decades, said Mr C.J. George, Managing Director of Geojit BNP Paribas Financial Services. In every up cycle, the market rallies about two to three times from its bottom level. According to him, the market is currently at that point in the cycle where it is reasonably risk free to invest in good stocks for a two-to-three-year period.

“The market is now more complicated and more dynamic after the participation of FIIs, and is now integrated with the global market. Earlier one could look at the Indian situation and come to certain conclusions. But that is no longer possible,” he said.

A Decade now

There are brokers, like Mr Rajesh Baheti, who hold that long term for the ordinary investor would now be at least 10 years. Anything shorter than that as long term would not work, and would require one to be an active portfolio manager. “The message to retail investors is to keep putting money in. From 2003 to 2007-08, the growth was way above the trend line, from then on normalisation has to happen.”

He points out that veteran investors such as Mr Rakesh Jhunjhunwala held on to a stock like Titan for years and years, so can a smaller investor afford to think any less as long term.

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