Equity and Long Term go hand in hand. Whenever you hear or read about investing in Equity, the concept of long term follows. That we should invest in Equity for Long Term, because Equity is risky in the short term.

But what exactly is this long term? How long is long term for Equity investing?

For tax calculation, any equity investment which is held for more than a year becomes a long term investment. But practically, investing in equity with a one year investment horizon is totally absurd. One year is a very short holding period for Equity investments.

Over the short term, equities are volatile, there are times when stocks have even doubled overnight, but there are also times when stocks have fallen by half over a night. So, the principle of long term stands to negate the volatility associated with equity over short periods.

The following is the BSE sensitivity table, it shows the returns from the Sensex for different investment periods from March 1979 until March 2018.

This table explains what we narrated above, as we see over short periods, both the maximum as well as the minimum returns are on the extreme, but as we move towards longer periods, the returns are stabilizing and the gap between the maximum and the minimum is alleviating. In shorter investing periods, the probability of making losses is quite high, but as the horizon increases the probability of loss significantly decreases and eventually becomes 0. So, an Equity investor in order to get desired returns and maintain enough distance from the the risk arising out of the volatility, must have a holding period where the probability of loss is low or Nil.

So, coming back to the main question, how long is long term?

The longer the better. There is no ceiling to the term long term, the more time you give to your investment, the less prone is your investment to risk and compounding works to generate superior wealth for you. Quite often we come across anecdotes where people totally forgot about their share certificates and made humongous wealth when they eventually sold their investments. In some cases, the investor died and his family got enough money to sustain a lifetime from his Equity investments which he made decades back. There is a popular equity investing strategy which is called 'being dead', that is invest and then forget about it.

Holding an investment perpetually can generate breathtaking returns and create spectacular wealth for you, but may not be practical. You have your needs, you have your goals to be fulfilled, which is why you invested in the first place. Equity markets grow in cycles, there is surge, then there is a steep correction before the markets eventually stabilize. To neutralize the risk in the investment, the holding period must cover all the phases of a cycle, which is generally between 5-10 years.

Generally Indian investors do invest for long periods of time, but mostly in traditional investment instruments. Investors invest in traditional tax saving instruments like PPF and then maintain their cool till the PPF's maturity, which is 15 years. But when it comes to Equity, they will keep checking the prices/NAV's, get tensed when their investments fall or get excited when they are making profits, and eventually end up selling their investments to avoid losses or to book gains. If the investor gives the same amount of time to his ELSS investment as he gives to his PPF, and simply forget about the investment as he does in case of his PPF, he will be amazed by the amount of wealth he could create by being invested in Equity.

Following is a snapshot of the value of Rs 1 Lac invested in PPF and in an ELSS scheme for 15 years.

An investor who invested in an ELSS scheme 15 years back would have made 4.5 times more wealth than an investor who invested in a PPF at the same time. And such superior returns are witnessed in all kinds of equity schemes over long periods, be it diversified schemes, large cap schemes, mid or small cap schemes, thematic schemes, etc. So, like you give time to your other investments like PPF's, or gold or property, if you maintain the same amount of patience in case of your Equity investments also, some of your greatest blessings will come with these investments.

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One of the fundamental elements that go into Financial Planning is Asset Allocation. Asset Allocation means bifurcating your investment portfolio between different asset classes, like Equity, Debt, Gold and Real Estate. The idea is to arrive at an allocation which helps the investor achieve his/her life goals, and also is in line with his/her Risk Profile, this ratio is called ideal asset allocation.

To arrive at this asset allocation, your financial advisor will take your existing assets as the base. So, your existing stock investments will go into the Equity component, your real estate investments will go into the real estate component and so on. And then you develop a strategy to liquidate some assets and invest in some other assets to arrive at and maintain the Ideal Asset Allocation.

Here, one common error that most investors commit is they misjudge their existing asset base. We tend to skip a lot of our existing, often valuable assets. Even when an investor says he/she is 100% invested in Equity, it may not be the case. It means that 100% of his/her liquid assets are invested in Equity. The house you live in, if you own it, or your ancestral property these are are your assets. India is the largest consumer of gold, it's there in our houses or in our bank lockers, it's a part of our portfolio. The innumerable Fixed Deposits, RD's, PPF's, EPF's that you hold are your Investments. When you take investment decisions take into account all your assets. We don't even mention these assets to our financial advisor who is helping us in defining our ideal asset allocation. So, what happens is the advisor does not get a clear picture of our portfolio, and we are eventually tampering with our ideal asset allocation and overall financial planning.

If you skip one asset, let's say if you ignore your FD's, then your Portfolio's inclination towards debt will be more than required. And at times the asset that you are skipping may be of substantial value. Like you may have missed some kgs of silver and few gold coins which were left to you by your grandmother, and the value of this hidden treasure is Rs 20 Lacs. The Gold component in your ideal Portfolio is just 5%, and if you omit telling about these riches to your advisor, then your Portfolio is significantly bent towards Precious Metals, which should have been ideally invested in Equity.

Hence it is critical to to count all your assets when you begin with Portfolio Allocation and Financial Planning.

However, in most cases, investors miss to count an asset because they do not realize that it is an asset.

So, before moving further, let's understand what exactly is an Asset?

An asset is a product or property that you own, either tangible or intangible, which fulfills the following characteristics:

> Value

> Liquidity

Anything which has value, and can be liquidated to fulfill your goals or discharge an obligation, is an Asset. While determining your asset allocation, it is important that you take into account all that you have which fulfills the above criteria.

Now, it's relatively easy to calculate the value of financial assets, like FD's, stocks, EPF, etc. You can also get an approximate value of your gold. Real Estate is the tricky one here. One, the valuation of real estate is complicated, and secondly, your stance property on the property may be complicated. Say for instance, there is an inherited property which is jointly owned by 10 cousins of yours apart from you, and you know you cannot get an affirmation for sale at least in this life. Or a family farmhouse, which will never be sold, or the house which you plan to gift to your children, and have no intention to sell. Such properties, that is, which cannot be liquidated to fulfill a goal, cannot be construed as an asset.

Similar is the case with inherited jewelery, in fact, any piece of jewelery in most cases. Jewelery cannot be construed as an asset, if you are emotionally connected to it, and have no intention of selling it.

So, assets which are valuable, but cannot be liquidated, must not be counted on for your future goals.

The bottomline, Asset Allocation is one of the preliminary procedures in your overall financial planning, each of your investments is dependent upon your Asset Allocation. Your financial plan is flawed if you omit revealing a full account of the assets that you own, to your financial advisor. The advisor will be able to deliver quality advise, if only he has a holistic view of your existing asset base.

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This is one of the most common questions that the investors in their late 50's, about to retire in the next few years, have. One of the fundamental concepts of investing is keeping the portfolio allocation bent towards equity when the investor is young and as he/she grows old, debt should occupy a major share of the Portfolio. However, it is seen that many investors take the concept to extreme levels by liquidating their entire equity portfolio and converting it to 100% debt, when their retirement approaches.

Is this the right thing to do?

Certainly Not.

This is not the right thing to be done, a balance needs to be maintained at all times, debt can control your risk, but it cannot grow your money. And you still have a third of your life, nearly 30 years lying ahead at the mercy of your retirement corpus. After all you have to plan for yours as well as your spouse's lifestyle maintenance for all those years.

So, what is the ideal Debt Equity allocation for retirees?

The answer to this is there is no specific allocation, it depends on the Retiree's financial position, Health and Risk tolerance levels. Say for instance, a retiree not having a source of regular monthly income, a traditional endowment policy in the name of insurance, only the Retirement corpus to bank upon for the rest of his life, it may not make sense for him to invest largely in equity or any other product which is risky in nature, because his principal need would be regular income and providing for emergencies. So, ideally this investor must be keeping a significant portion of the Portfolio in Debt so that the risk remains controlled, and he is able to meet his needs without the tension of losing the principal.

While bifurcating your portfolio between Debt and Equity, you must remember, that about the debt part along with Risk Control, Liquidity is also important. You'll be needing money for your regular income needs, plus there will be sudden expenses, like paying for AC repair, buying a new washing machine, buying an expensive wedding gift for your niece, helping an old friend in need, and the like. The remainder of your Portfolio can be directed towards wealth creation products like Equity mutual funds because there is a long period ahead and Equity's potential along with the power of compounding will work to push up the returns. Also, you must note that, when you use your debt investment, it's important to refill the safe investment bucket, from time to time, so that you have ample liquid and risk free money to last throughout your life.

The percentage allocation to Debt and Equity varies from person to person, it depends upon your financial position and various other factors, like if a retired person living in his own house, is getting a monthly pension, has a decent emergency fund, adequate medical and term insurance can consider investing a large part of his Portfolio in Equity since he has his expenses as well as risks covered.

You can sit with your advisor, and discuss with him your finances, your unique needs, your risk appetite and arrive at your ideal allocation between Equity and Debt. Further there are two approaches to maintaining your ideal asset allocation. You can have a fixed Debt Equity asset mix like 80:20 or 60:40 or 40:60, and keep rebalancing your Portfolio, to bring it back to the model Portfolio. Another approach is you can start with a portfolio with a higher allocation to Equity, since retirement may last for few decades, you can have a fair amount of Equity in the early stages and as you age, you can gradually bring down Equity and invest in debt, so may be when you reach your mid 70's, you can settle for a fixed portfolio.

Investing in balanced funds can also be considered, for maintaining the ideal asset allocation.

So the bottomline is, the general rule of increasing your asset allocation to debt when you are growing old, may or may not apply to you. It really depends upon a number of factors that is your unique circumstances. So, consult your financial advisor and devise your financial plan to ensure maximum peace in your second innings.

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