How Long is Long term?
MAS Team | 12 June 2013
What is the secret to successful investing? Or rather, why do many investors fail? The answer is very simple: Patience to invest for the long term. This answer would probably not surprise you. Unfortunately, most investors do not put this trait into practice let alone let it develop because they don’t know how long is the long term. After all media keeps reminding you every few days that stocks (meaning the Sensex has not gone anywhere for more than five years now).
So what is the long-term that investors must focus on when they invest in stocks? And if they don’t focus on this long-term, what happens? They get frustrated, not only with themselves but even with experts. Did you know that even great investors go through periods of poor performances that can stretch for years? In fact, if you rank them on bad years, they’ll end up somewhere at the bottom of the rankings. Davis Advisors of the US studied the top managers between January 1998 and December 2007 and found out that a staggering 98% of the fund managers who are ranked at the top fell to the bottom half of the rankings in at least one three-year period, between 1998 and 2007. In other words, just like any other normal investors, even great investors go through periods of underperformance. 
According to a study by Davis Advisors, many “investors often make decisions that can undermine their ability to build long-term wealth”. Investors spend far too much time worrying about when the market will top or bottom out rather than patiently waiting to ride out the market. “The patient investor who remained invested during the entire 15 year period received the highest average annualized return of 10.5% per year,” said the study by Davis Advisors. Shelby Cullom Davis, a legendary investor once said, “You make most of your money in a bear market, you just don’t realize it at the time.”
According to Davis Advisors, stocks invested in Dow Jones Industrial Average delivered a positive return in 59 out of 80 one-year periods (74% of the time). However, if one extended the holding period to only five years, stocks delivered a positive return 93% of the time (71 out of 76 periods).
Look at 5-year and 10-year rolling returns of Sensex below. The evidence is startling and heavily favours long-term investors. Sensex has never delivered a single negative return for any 10-year period since 1991, a 100% record, while it delivered just three negative five-year periods since 1991 (an 84% record). So, the ideal long-term could is somewhere around 10 years. 

During this period, you will hear regular commentary that mutual funds and stocks are terrible investment. That leads us to another lesson: successful long term investors always ignore the media noise that is not based on deep research but on random analysis. The Davis Advisors’s study found that even economists’ forecasts were wrong in 35 of the 52 time periods–67% of the time—between 1982 and 2008. You would have been better off spending time pursuing your favourite hobby and watching the scenery rather than following pundits’ recommendations.