Benefits of Holding Stocks for the Long-Term

Long-term investing includes holding investments for more than a year. This technique entails investing in assets such as bonds, equities, exchange-traded funds (ETFs), mutual funds, and others. Individuals who take a long-term approach must be disciplined and patient. This is because investors must be willing to accept some risk in exchange for greater benefits later on.

Investing in and owning stocks is one of the finest methods to build money over time. For example, from 1975 to 2022, the S&P 500 recorded yearly losses in only 11 of the 47 years, illustrating that the stock market creates returns far more often than it does not.

Better Long-Term Returns

The word asset class refers to a certain type of investment. They have similar traits and qualities to fixed-income assets (bonds) or equities, which are generally referred to as stocks. The asset class that is ideal for you is determined by various criteria, including your age, risk profile and tolerance, investment goals, and available capital. But what are the best asset classes for long-term investors?

When we examine asset class returns over several decades, we find that stocks have outperformed almost all other asset classes. Between 1928 and 2021, the S&P 500 returned an average of 11.82% every year. This compares well to the three-month Treasury bill (T-bill) return of 3.33% and the 10-year Treasury note return of 5.11%.

Emerging markets have some of the largest potential returns in the equity markets, but they also have the highest level of risk. This class has historically produced strong average yearly returns, but short-term volatility has hampered their performance. As of April 29, 2022, the 10-year annualized return of the MSCI Emerging Markets Index was 2.89%.

Small and large caps have also outperformed the market. For example, the Russell 2000 index, which measures the performance of 2,000 small businesses, returned 10.15% over a 10-year period.

 As of May 3, 2022, the large-cap Russell 1000 index has a 10-year average return of 13.57%.

 Riskier equities classes have generally outperformed their more conservative equivalents.

Ride Out Highs and Lows

Stocks are seen as long-term investments. This is due, in part, to the fact that it is not uncommon for stocks to lose 10% to 20% or more of their value in a short period of time. Investors can ride out some of these highs and lows over many years or even decades in order to achieve a higher long-term return.

Individuals have rarely lost money investing in the S&P 500 over a 20-year period, according to stock market returns since the 1920s. Even after accounting for setbacks such as the Great Depression, Black Monday, the IT boom, and the financial crisis, investors would have made money if they had invested in the S&P 500 and held it for 20 years.

While previous performance is no guarantee of future results, it does imply that long-term stock investing often produces positive benefits when given enough time.

Investors Are Poor Market Timers

Let's face it: we're not as calm and sensible as we claim to be. In fact, one of the inherent weaknesses in investor behavior is the tendency to be emotional. Many people profess to be long-term investors until the stock market begins to collapse, at which point they tend to withdraw their funds to avoid further losses.

When the market recovers, many investors abandon their stock holdings. In fact, they usually return only after the majority of the gains have been made. This type of purchase high, sell low conduct tends to stifle investment gains.

According to Dalbar's Quantitative Analysis of Investor Behavior study, the S&P 500 had an average yearly return of little over 6% over the 20-year period ending Dec. 31, 2019. During the same time period, the average investor earned an annual return of roughly 2.5%.

This occurs for a variety of reasons. Here are a few examples:

• Investors are afraid of being wrong. People frequently fail to trust their own judgment and instead follow the hype, especially when markets are down. People sometimes get into the trap of fearing that they would regret holding onto equities and lose a lot more money as they decline in value, so they sell them to alleviate that anxiety.
• A sense of pessimism when things change. During market rallies, optimism reigns supreme, but the inverse is true when things go wrong. Short-term surprise shocks, such as those related to the economy, can create market swings. However, it is crucial to realize that these upheavals are frequently transient, and things will most likely improve.

Investors who pay too much attention to the stock market reduce their chances of success by attempting to time the market too regularly. A simple long-term buy-and-hold strategy would have produced significantly better earnings.

Lower Capital Gains Tax Rate

Profits from the sale of any capital assets result in a capital gain. This includes personal possessions like furniture as well as investments like stocks, bonds, and real estate.

Any gains made by an investor who sells a security within one calendar year of purchasing it are taxed as regular income. These are known as short-term capital gains. This tax rate might be as high as 37% depending on the individual's adjusted gross income (AGI).

Any securities that are sold after being held for more than a year result in long-term capital gains. Gains are only taxed at a maximum rate of 20%. Lower-income investors may potentially be eligible for a 0% long-term capital gains tax rate.

Less Costly

Money is one of the primary advantages of a long-term investment strategy. Keeping your stocks in your portfolio for a longer period of time is more cost-effective than buying and selling frequently since the longer you retain your investments, the fewer fees you must pay. But how much does all of this cost?

You save money on taxes, as we stated in the last section. The Internal Revenue Service (IRS) must be notified of any gains from stock sales. This increases your tax liability, resulting in more money out of your pocket. Remember that short-term capital gains can cost you more than long-term capital gains if you retain your assets for a longer period of time.

Then there are transaction or trading fees. The amount you pay is determined by the type of account you have and the investment firm in charge of your portfolio. You may be charged a commission or a markup, for example, where the former is subtracted when you purchase and sell through a broker and markups are levied when the sale is directed through their own inventory. When you trade equities, these fees are added to your account. This means that with each sell, your portfolio balance will decrease.

Firms frequently levy continuing costs, such as account maintenance fees, which can deplete your account balance. So, if you're a regular trader with a short-term goal, your expenses will mount up even more when transaction fees are factored in.

Compounding With Dividend Stocks

Dividends are profits provided by companies that have a proven track record of profitability. These are typically blue chips or defensive equities. Defensive stocks are those that perform well regardless of how the economy or the stock market performs.

These companies pay regular dividends to qualifying shareholders on a quarterly basis, which means you get to partake in their success. While it may be tempting to cash them out, there is a compelling reason to reinvest your dividends in the firms that pay them.

If you hold bonds or mutual funds, you are already aware of how compound interest affects your investments. Compound interest is any interest computed on your stock portfolio's principal balance plus any previous interest earned. This implies that any interest (or dividends) earned on your stock portfolio compound over time, increasing the value of your account in the long run.

Best Types of Stocks to Hold for the Long-Term

When it comes to purchasing stocks, there are various factors to consider. Consider your age, risk tolerance, and investment objectives, among other things. Having a firm grasp on all of this might assist you in determining the type of stock portfolio you need to fulfill your objectives. Here's a general beginning point that you can modify to your specific situation:

• Choose index funds. These are ETFs that track certain indexes, such as the S&P 500 or the Russell 1000, and trade similarly to stocks. But, unlike stocks, these funds are less expensive, and you won't have to pick and choose which firms to invest in. Index funds provide similar returns to the indices they track.
• Consider dividend-paying stocks. These companies can help add value to your portfolio, especially if dividends are reinvested.
• High-growth companies can help your portfolio. Growth stocks are associated with companies that can generate much higher revenue at a faster rate than others. They are also better prepared to deliver impressive profit reports. Keep in mind, however, that this amount of development comes with a larger level of risk, so you'll need to be a little more savvy than inexperienced investors if you want to go this path.

Always consult with a financial advisor, especially if you're new to the investment world.

The Bottom Line

Stock investors might benefit from a variety of trading tactics. Investors with more experience and a larger cash pool may be able to ride the market waves and profit from short-term trading tactics. However, this may not work for folks who are just starting out or cannot tolerate too much danger. Long-term stock holdings can help you ride market highs and lows, benefit from lower tax rates, and are less expensive.