As you navigate your way through the various standalone videos, posts and other content on the PIE site, you will hear a lot of talk about investing for the long-term. In Indian markets, that long-term really means only about 30-odd years, certainly not long enough for economists to make any such statements boldly. But we tend to make them anyway!!
Notions like diversification and long-term investing presume generally that risks will tend to cancel out. When you diversify across different classes of assets, chances are that not all of them will underperform at the same time. Several of us even relate this to the business cycle and you will read/hear appropriate recommendations. Buy growth stocks when the economy is roaring, buy food and drugs and defensives when the economy is not.
The assumptions underlying long-term investing are a little different though. It is not just about how we view time, but it is an implicit statement that, over the long-term, there will be periods of above-average returns and periods of below-average returns. How long and how much are the obvious uncertainties in this picture. So it ends up becoming a belief in how future returns are likely to behave. Is the return from one year independent of the next? Or are these returns correlated year over year– a little, a lot? Will the trend continue to be upward despite the ebbs and flows in investment returns? And, perhaps more importantly, how will you react to wealth 10 years from now as opposed to today. If you have been fortunate enough to have made a lot of money, your propensity for taking risk can be quite different from what it is now. These are complicated questions, economists have been grappling with them for a long time. My point again, is simply to show you that there are many assumptions about decision making, about how we make choices- that lurk behind the simple rules that salesmen always seem to prescribe.