For many investors, particularly those in retirement, the question ‘how long is long-term?’could also be translated as ‘I’m getting on a bit, so should I still be investing in the stock market?’. When it comes to systematic investing, that is to say, capturing specific market risks in a disciplined and rules based manner, a secondary question might also be ‘should I still own value and small cap equities, as their excess returns, relative to the market, can take some time to come through?’.
Even at age 80, when investors may begin to ask themselves the question ‘how long is long-term’they should still consider 20 years to be a sensible horizon. After all, according to a useful little calculator provided by the Office for National Statistics, today, an 80-year-old woman has an average life expectancy of 90, a 1-in-4 chance of reaching 94 and 1-in-10 chance of getting to 98. At Wells Gibson we believe it’s prudent to consider the following:
- As an investor in equities, you have around a 1-in-4 to 1-in-3 chance that you will suffer a loss in any one year. Yet, with a 10-year horizon, a 40 bond / 60 equity ‘balanced’ portfolio has a better than 1-in-20 chance of suffering a loss in any one year;
- For long-term investors, cash is an extremely dangerous asset class, particularly when viewed after the effects on inflation, as it should be. It is worth noting that over the 10 years since the Credit Crisis those placing their assets in UK cash have lost over 20% of their purchasing power;
- Portfolios tilted towards value and smaller company equities exhibit worst-case outcomes materially better than un-tilted portfolios at 10-year horizons and beyond. This helps answer the question whether an investor who is 80 should include value and smaller company equities in any equity allocation they hold. They probably should; and
- Investors with horizons longer than 10 years, even those simply seeking to maintain purchasing power, should own a meaningful level of equities in their portfolio; and
- Cash and bonds alone are unsuitable for most longer-term investors.
Answering the question
On balance, ‘long-term’should be defined as 10 to 15 years minimum. Above 15 years, the chances of a negative purchasing power outcome are low, but risk still exists! To be prudent, 15 years might be considered as the lower end of ‘long-term’, which is still within the investment horizon of most investors, including those in their 80s.
We hope that helps answer the question however as always please don’t hesitate to contact Wells Gibson if you have any questions.