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Questions have been raised recently over whether short-termism has once more started to dominate fund performance assessment. What constitutes investing for the long term, investors have asked, when in fact many equity markets have faltered or fallen behind cash returns over the last decade?

Is short-termism actually the correct response to volatile equity markets?

Max King, strategist and portfolio manager at Investec Asset Management, thinks not. “Just because returns in the past have been so bad and the outlook is poor is not a reason to run away,” he argues. “People tend to throw in the towel for equities and then get taken aback when the trend re-establishes itself in the next decade.”

Yet according to Investec’s figures, over 10 years to the middle of 2008, the 3.5 per cent annualised return of the All-Share index and the 2.5 per cent return of the S&P have hardly kept up with inflation.

And for many investors the long term is getting longer: the markets show no immediate signs of rallying. “It can be very dangerous to get sucked in at the top of the market,” says Martin Harrison, head of UK mutual funds at GAM. “But people should also accept the dangers of leaving money in cash. It’s a good way of destroying purchasing power.”

Most financial advisers would argue it is all about determining a time horizon and investing accordingly – a point taken up by Anne Richards, chief investment officer at Aberdeen Asset Management. “One of the things that makes the market efficient and liquid in the long term is that people have different time horizons,” she says. The interplay of traders and pension funds – with a myriad of other investors in the middle – provides the very basis for the market.

But if that is so, then given the ongoing volatility should long-term investors now think on a five-year or a 10-year basis? “The measure with equities”, continues Ms Richards “is that it is something you do with a long-term horizon. I’m talking about 20 years plus. Equities are linked to the real economy and businesses are growing over time while cash isn’t. Unless we’re in a period of disinflation then equities will always do better over time.”

Partly investors’ concerns over what constitutes the “best” – or most effective – time horizon, as well as the constant comparison with cash returns, have been driven by the rise of shorting and absolute return funds. The inexorable rise of hedge funds has also seen many investors move from being long-term holders of equities to pursuing more short-term trading strategies.

The investment approach will also be determined by just how confident the manager feels about forecasting future trends. Terry Ewing, co-head of the North American desk at Resolution Asset Management, likens the process to flying in bad weather. “It is like landing a plane in the fog,” he says. “At one point it just simply becomes too dangerous. If it is too cloudy, then we’re just not willing to bet our investors’ funds without concrete evidence.”

Given the current market volatility, Mr Ewing is pursuing a more cautious approach. “What we’re doing as investors is stepping back,” he explains. “We’re trying to adopt a more defensive approach until we feel the visibility improves enough for us to improve our risk profile.”

Ultimately, Martin Cholwill, manager of the Royal London Equity Income unit trust, believes he has the solution. “Stock markets are inefficient at pricing shares,” he points out. “Time horizons expand and contract all the time.”

During the tech boom investors took incredibly long views to justify paying high valuations and now the market is far more short term in its outlook. “You should always aim to have a slightly longer time horizon than the stock market,” Mr Cholwill adds.

In the light of the credit crunch stock selection is also becoming key for managers, he continues. “Beforehand any failing company could have been the target of a takeover. Now debt is much more expensive to finance an acquisition so stock selection has become far more critical.”

For Investec’s Mr King, however, we could be on the cusp of change. “Although I can’t guarantee we are on the starting block now, people who buy and hold equities for the next 10 years will do very well. The bad news is that you’ll have to wait for 10 years until you find out whether I’m right or wrong.”

Hugo Greenhalgh is editor of Investment Adviser