In investing, a long time frame is qualitatively different from a short one
05-May-2017 •Dhirendra Kumar
I recently met someone who was just back from a fund-selling trip to Japan. During the trip, he met various groups of potential investors, in meets organised by a Japanese mutual fund distributor. At the very first event, my friend, who was new to Japan, was taken aback when he saw the attendees. The minimum age appeared to be about 65 and there were many in their seventies. Since the product being pitched was a mid-cap fund, the audience' age profile seemed somewhat problematic. A mid-cap fund is by definition a volatile investment and no conscientious advisor in India would recommend it to an older person. Here, there were only older persons.
When my friend explained his conundrum to the distribution company's representatives, his objections were met with amusement. Firstly, almost every investor in Japan is old, figuratively speaking. Nothing remarkable in that. Secondly, they all expect to live at least to 90 or 95, the average life expectancy at 70 is 87. However, the most important fact was that these were investors who had seen a bear phase that had lasted a quarter of a century. They really understood that risk was not volatility, but year after year, decade after decade of no growth in your investments.
Regardless of the enormous difference between Japan and India, the same counterintuitive lesson holds in India as well. Old age is long, and most often without any income. Given the tiny real returns that the fixed income deposits so beloved of Indian retirees gets, we need a more logical definition of risk. Years and decades of stagnation in wealth is a real risk. A little temporary volatility that lasts for weeks or months is not a real risk. When you're used to deposits, time makes only a quantitative difference. A longer time frame is just more of shorter time frames. For equity investments, that's not difference. Time changes everything, and a longer time frame delivers something qualitatively different from a shorter one.