Equity investing: How to define ‘long-term’ and ‘short-term’

Published: December 24, 2015 at 12:01 pm

Last Updated on

You  may have heard statements like, ‘equity investing is for the long-term and not for the short-term’. Exactly how long is ‘long’ and how short is ‘short’?Here is how short-term and long-term are defined.

This post assumes knowledge of CAGR and standard deviation. If you are not familiar with these, but interested to know more, do consider watching these short videos:

What is CAGR – Compound Annual Growth Rate: Video

How to measure risk associated with an equity investment

In both these videos , I had used the annual returns of ICICI Pru Top 100 fund.


The green line represents the arithmetic average (what we calculate usually), 29.3%. The blue lines represent deviation of each annual return from the average. The average of these deviations defined so that it is always positive is the standard deviation: 38.6%.

So this data is usually reported as average = 29.3% +/- 38.6%.  This means (to those who familiar with the normal distribution) that each annual return has 68% chance of being in that return window.  This is both simple as well as simplistic. However, it is a  good way to understand investment risk.

the standard deviation is a measure of uncertainty in the average return. If the uncertainty is larger than the average return itself, then the average has little value. This is the key to separating long-term from the short-term.

To know more about the normal distribution, you could consult What Return Can I Expect From Equity Over the Long term? Part 2

Suppose I ask myself, “what return (CAGR) can I expect if I invest in equity (in this fund in particular) over the next 5 years?”. To answer this, let us look at the CAGR of every 5-year window in the past with the above annual returns data.


CAGR from 1st Jan 2003 to 31st Dec 2007: 47%

CAGR from 1st Jan 2004 to 31st Dec 2008: 13%

CAGR from 1st Jan 2005 to 31st Dec 2009: 23% and so on as shown above.

Notice that the 5-year window ‘rolls over’.

The arithmetic average of all these 5-years CAGRs is 17.5% with a standard deviation of 13.7%.

If I report 17.5% as the average CAGR in the past, that looks terrific. However, if I report that the uncertainty associated is 13.7% that return does not look so hot. Standard deviation is a measure of volatility and potential investment risk.

Now let us look at a truly incredulous graph. Suppose I had annual returns of the Sensex total returns index ((dividends included)  from 1979 and 2013 and calculated the CAGR of every 3,5,7,10,12,15,20 and 25 year periods possible and calculated the average CAGR, it would like this


If I gave out only this information then it looks as if the average CAGR over 3-year investment periods is as high as that over 25-years!

The key information missing is the standard deviation. That is we must also report how much individual 3-year CAGR can deviation from the average.


This to me is the defining graph for investment risk. Notice how the standard deviation is extremely high, double-digit for up to 7-years and then drops down.  This means for up to 7 years, there can be significant volatility in equity returns.

My long-term starts at 10 years and I would prefer 15 years if possible.


My short-term is 0-5 years and I will not touch equity for such durations.

My intermediate-term is 5-10 years with about 10-30% equity exposure.

My long-term is 10+ years and anywhere between 50-70% equity exposure with the recognition that my entire portfolio could fall in value by 50-70% if there is a market crash. Read more:   Asset allocation for long-term goals

Here is a step-by-step guide to decide  asset allocation for a financial goal

These are of course my definitions of short-term and long-terms. Definitions are personal, but I think ought to be backed by some kind of reasoning. Using the standard deviation is one way to do it. Would be delighted to know more about your definitions.

Caution: Do not assume that long-term equity investing will always be successful! The nature of the above graphs will change over time.

Do share if you found this useful

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.


  1. Good article. It would be very helpful if more evaluation measures, similar to SD is added with explanations as to the relativity of the same to the returns..
    Thank you.

Leave a Reply

Your email address will not be published. Required fields are marked *