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A long-term investment plan means keeping your investments for over a year. This involves holding onto bonds, stocks, ETFs, and mutual funds. It needs patience and self-control because you must be okay with taking risks while waiting for bigger rewards.
Investing in stocks and keeping them long is a great way to make more money. For instance, out of the past 50 years since 1974, the S&P 500 only had yearly losses in 13 years. This shows that most of the time, the stock market makes money rather than losing it.
KEY TAKEAWAYS
- Investing in stocks for the long haul usually gives better results than trying to buy and sell quickly to catch the market’s ups and downs.
- Making investment decisions based on emotions usually lowers the returns for investors.
- The S&P 500 made money for investors in most 20-year periods.
- Staying calm during temporary market drops is often seen as a trait of a successful investor.
- Long-term investing saves money and lets you grow your earnings from dividends over time.
Better Long-Term Returns
An asset class is a group of investments with similar features, like bonds for fixed-income assets or stocks for equities. The right asset class for you depends on things like your age, how much risk you’re okay with, your investment goals, and how much money you have. But what are the best asset classes for people who want to invest for the long term?
Over many decades, stocks have usually done better than other investments. For example, the S&P 500, which tracks big US companies, made an average of about 9.80% each year from 1928 to 2023. This is higher than the returns from short-term Treasury bills, 10-year Treasury notes, or gold, which made less money during the same time.
Emerging markets offer big opportunities for making money in stocks but also come with the biggest risks. While historically, they’ve made high average yearly returns, their performance can change significantly in the short term. For example, as of Dec. 29, 2023, the MSCI Emerging Markets Index had an average yearly return of 2.66% over the past ten years.
Both small and large companies have given better-than-average returns. For example, as of Jan. 26, 2024, the Russell 2000 index, which tracks 2,000 small companies, had an average yearly return of 7.08% over the past ten years. Meanwhile, the Russell 1000 index, which follows big companies, had an average return of 12.39% for the same period.
Important: Riskier investments in the stock market usually make more money than safer ones.
You Ride Out Highs and Lows
Stocks are seen as investments you hold onto for a long time. This is because it’s common for their value to go down by 10% to 20% or even more quickly. Investors can make more money in the long run by sticking with them through these ups and downs for many years or even decades.
When we look at how the stock market has done since the 1920s, most people haven’t lost money by investing in the S&P 500 for 20 years. Even with big problems like the Great Depression, Black Monday, the tech bubble, and the financial crisis, investors would have made money if they had invested in the S&P 500 and kept it for 20 years without selling.
Although what happened before doesn’t promise the same will happen again, it shows that investing in stocks for a long time usually leads to good results.
Decisions May Be Less Emotional, More Lucrative
Let’s be honest; we’re not always as calm and logical as we think. One big problem with investing is that people let their emotions get in the way. Many say they’re in it for the long haul but often take their money out when the stock market drops to avoid losing more.
Dalbar’s study on investor behavior found that from 1992 to 2022, the S&P 500 made around 9.65% each year on average. However, during that same time, the average investor in equity funds only made about 6.81% per year.
There are a couple of reasons why this occurs. Here are just a couple of them:
- Investors are afraid of feeling regret. Instead of trusting their own decisions, they often follow the crowd, especially when the market goes down. They worry they’ll regret keeping their stocks if they lose even more money, so they sell them to avoid that feeling.
- People tend to feel negative when things change. They’re optimistic when the market is going up but become pessimistic when it goes down. Sometimes, the market moves a lot because of unexpected things, like economic changes. But it’s important to know that these changes usually don’t last long, and things will probably get better again.
Investors who watch the stock market too closely often hurt their chances of success by trying to guess when to buy and sell too often. A simple strategy of buying and holding for the long term would have given much better results.
Lower Capital Gains Tax Rate
Any money you make when you sell something valuable, such as furniture or investments, such as stocks, bonds, or real estate, is called a capital gain.
If an investor sells a security within one year of buying it, they must pay taxes on any profits at the same rate as their regular income. These are called short-term capital gains. This tax rate could be as high as 37% depending on how much money they make.
You’ll have long-term capital gains if you sell securities after holding them for over a year. These gains are taxed at a maximum rate of 20%, but people in lower tax brackets might not have to pay taxes.
More Cost-Effective
One big advantage of investing for the long term is saving money. When you hold onto your stocks for a longer time, you pay fewer fees compared to buying and selling them often. But how much does this save you?
Next, there are trading fees. How much you pay depends on your account type and the investment company you use. For example, you might have to pay a commission or markup. Commissions are taken out when you buy and sell through a broker, while markups are charged when the sale goes through the company’s stock. These fees are taken from your account every time you trade stocks. So, every time you sell, your portfolio balance goes down.
In 2024, many investors will use online brokers that offer free trades. This means you might not have to pay anything to make some or all of your trades. However, it’s still important to consider whether the time you spend trading is worth it compared to how much money you might make with a long-term buy-and-hold strategy.
FAST FACT
Companies sometimes have fees that continue over time, like account maintenance fees, which can lower your account balance. So, if you trade often and have short-term goals, your fees can get even higher when you include transaction fees.
Benefit From Compounding With Dividend Stocks
Dividends are profits given out by successful companies. These companies are usually big and stable or do well even when the economy is not doing great or the stock market drops.
These companies give out dividends regularly, often every three months, to shareholders who qualify. This means you get a part of their profits. While you might want to take the money, there’s a good reason to put it back into the companies that gave it to you.
If you have bonds or mutual funds, you’ll see how compound interest works with your investments. Compound interest is when you earn interest on the original amount you invested and any interest you earned. This means the interest (or dividends) you earn on your investments grows over time, making your account balance bigger in the long run.
Best Types of Stocks to Hold for the Long-Term
When buying stocks, consider your age, how much risk you’re comfortable with, and what you want to achieve with your investments. Knowing these things can help you decide what type of stock portfolio is right for you. Here’s a basic guide you can use to get started, and you can adjust it to fit your own needs:
- Pick index funds. These are like ETFs that follow certain indexes, like the S&P 500 or the Russell 1000, and trade like stocks. But they’re cheaper than stocks; you don’t need to choose which companies to invest in. Index funds give you returns similar to the indexes they follow.
- Think about buying dividend-paying stocks. They can make your portfolio more valuable, especially if you reinvest the dividends.
Talking to a financial expert is a good idea, especially if you’re new to investing.
FAQs
1. What are the tax benefits of holding a long-term stock?
Ans: The IRS taxes gains from selling investments differently depending on how long you’ve owned them. You pay taxes based on short-term gains if you sell something you’ve owned for less than a year. But if you’ve held onto it for over a year, you pay taxes based on long-term gains.
When you sell something you’ve owned for less than a year, the tax you pay is the same as your regular income tax rate, which can go up to 37%. But if you’ve held onto it for over a year, you’ll only pay a tax rate of 0%, 15%, or 20%, depending on how much money you make and how you file your taxes.
2. How Long Do You Have to Hold a Stock for It to Be Considered Long Term?
Ans: To be a long-term investment, you must keep a stock for at least 12 months. Anything less than that is considered a short-term holding like any other asset.
3. Can You Sell a Stock Right After Buying It?
Ans: The time you have to wait before selling a stock after buying it varies depending on your broker. Some brokers make you wait until the settlement date before selling, while others let you make same-day transactions within your account. If you make too many trades daily, you might be considered a day or pattern trader and need to maintain a minimum balance in your account.
The Bottom Line
Stock investors can use various strategies to make money. Experienced investors with lots of money might use short-term trading to ride market ups and downs. But this can be risky, especially for beginners or those who can’t handle much risk. Holding onto stocks for a long time can help you handle market changes better and benefit from lower taxes. It’s also usually cheaper.
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