A recent email I received concluded with the line “I'm looking at long-term say 5 years”. Wow.
When I was a kid growing up in the 80’s my grandfather always impressed on me that anything less than five years was considered short term and that was as short a time frame for investing in the stock market and I have loosely stayed with this theory.
I agree that for an investment five years should be the minimum duration as this is typically the longest period our market goes without a positive return. So, worse case you break even albeit still losing out to inflation. Further a share price needs to time to reflect fundamentals and in the short term the prce will be driven by all sorts of noise. Long-term it'll be driven by those fundamentals.
Back to my grandfathers advice. These days I base short-term as three years as that’s what SARS uses to decide if you are a trader or an investor. This SARS distinction is important as traders get taxed at their marginal rate whereas investors at their capital gains rate which is 40% of the marginal tax rate with a R40k exemption every year.
So, for me short term is a holding that is expected to be less than three years. Medium term is up to ten years and long-term is decades plus.
Think about it. We’re living well into our 80’s and even 90’s, three years is but a blip in that time horizon and real wealth creation via investing is easiest with decades of time. Of course, we’re in a hurry to get rich, but that hurry is more likely to bankrupt us rather than make us rich. If our portfolio is beating inflation by say 6% a year we need to give it decades to create real wealth and we need to think in these long decade time frames rather than weeks or months.
A last point on trader vs. investor and the tax treatment. I keep my trading and investing in separate accounts so that they are nice and clean come tax return time. There is still only one monthly admin fee and log in but when I log in the there is a drop down with the various accounts all in my name. So I am able to simple submit separate trading and investing activity to SARS.