What is long term in the financial markets?
Is it 5, 10, 15, 30 years?
Is it measured in terms of events such as a nation showing extraordinary growth over a certain period — like Japan in the 70s, the US in the 80s and 90s, India and China in the 2000s?
Or, is it defined by an institution’s or an individual’s investment horizon — like a pension fund or an investor saving for retirement.
Long-term investing may not pay off, as seen by the shortfall in assets of big pension funds in relation to their liabilities. The world’s largest pension fund, the California Public Employees Retirement System (Calpers), is said to be running a shortfall of assets over liabilities, implying that when liabilities come up for payment, the pension fund will not have enough assets to sell to meet the payment.
Individual investors saving for retirement find themselves on the wrong side of markets when the time comes to draw down on the corpus. For example, US retirement investors (401k) have hardly seen any returns from equities over 2000-12 – S&P 500 has returned just around absolute 3% in this period – and those planning to draw down their assets to fund their retirement do not have enough funds to do so.
Long term means different things to different people. A person who invested in the glory days of Japan where the Nikkei Index traded at over 30,000 levels in the late 1980s is much better off than a person who invested in Japan in the 1990s and 2000s as the Nikkei index has fallen over 60% from levels seen in the late 1980s. In short, long-term investors in Japan have lost money over the past 20 plus years.
Long-term defined in number of years can also lead to varying conclusions. Five years is long term for a retired person while 15 years is long term for a middle aged person.
So, how does one take it?
The right way to look at investments is that the long term is made up of a series of short terms. Get the series of short terms right and you make long-term gains on investments.
How does one do this?
Investors should look to invest when markets are overly pessimistic of the future (like in 2008 when markets collapsed and in 2011 when markets factored in the worst for the euro) or when markets are overly optimistic of the future (peaks of 2007 and 2010). The years 2008 and 2011 were cases of extreme volatility, but the fact is markets undergo these peaks and troughs regularly.
Long-term investors should use these peaks and troughs effectively to generate long-term returns instead of just blindly investing at whatever levels saying, “we are long term investors and we do not care for market levels”. The former will make the returns while the latter will get burned.
Parthasarathy is the editor of www.investorsareidiots.com,
a website for investors