Benefits of Holding Stocks
A long-term investment strategy entails holding investments for more than 12 months. This strategy includes holding assets like bonds, stocks, exchange-traded funds (ETFs), mutual funds, and more. It requires discipline and patience to take a long-term approach. That’s because investors must be able to take on a certain amount of risk while they wait for higher rewards down the road.
Investing in stocks and holding them is one of the best ways to grow wealth over the long term. For example, the S&P 500 experienced annual losses in only 13 years between 1974 and 2023, demonstrating that the stock market generates returns much more often than it doesn’t.
Key Takeaways:
- Long-term stock investments tend to outperform short-term trades when timing the market.
- Emotional trading tends to hamper investor returns.
- The S&P 500 posted positive returns for investors over most 20-year periods.
- Riding out temporary market downswings is often considered a sign of a good investor.
- Long-term investing cuts costs and allows you to compound earnings from dividends.
Better Long-Term Returns
Stocks have generally outperformed almost all other asset classes. For example, the S&P 500 returned an average of 9.80% per year between 1928 and 2023. This compares favorably to the 3.30% return for three-month Treasury bills, the 4.86% return of 10-year Treasury notes, and the 6.55% return for gold.
Small and large caps have also delivered above-average returns. For instance, the Russell 2000 index, which measures small companies, had a 10-year return of 8.39% as of October 2024. The large-cap Russell 1000 index had an average return of 13.15% during the same period.
You Ride Out Highs and Lows
Stocks are considered long-term investments because they can experience short-term fluctuations of 10% to 20% or more. Over a long period, investors have the opportunity to ride out these ups and downs. Historically, those who invested in the S&P 500 and held it for 20 years have rarely lost money.
While past results don’t guarantee future returns, long-term investing in stocks has generally yielded positive results over time. Benefits of Holding Stocks
Decisions May Be Less Emotional, More Lucrative
Many investors tend to panic and sell when the market dips, which can result in significant losses. Emotional trading often hampers returns. Studies have shown that while the S&P 500 returned an average of 9.65% between 1992 and 2022, the average investor’s return was only about 6.81% due to poor timing.
Lower Capital Gains Tax Rate
When you hold investments for more than a year, you benefit from lower long-term capital gains tax rates compared to short-term holdings. Long-term gains are taxed at a maximum of 20%, while short-term gains can be taxed up to 37%.
More Cost-Effective
Long-term investing reduces the number of transactions, which lowers costs such as transaction fees and taxes. Holding onto stocks also allows you to benefit from dividend reinvestment and compounding over time.
Benefit From Compounding With Dividend Stocks
Dividend-paying stocks allow investors to benefit from reinvested profits, which can compound over time, increasing the portfolio’s value.
Historical Trends: Stocks Versus Other Investments Stocks have generally outperformed most other investments over the long run. However, that performance depends on how long you hold your investments. As noted earlier, the S&P 500 has delivered an average annual return of 9.80% between 1928 and 2023. Even though the market has gone through tough times, including the Great Depression and the financial crisis of 2008, it has still produced significant returns for long-term investors.
For example, while bonds, gold, and real estate may offer some security in times of market volatility, they often don’t produce the same level of returns as stocks over time. One advantage of stocks is the ability to reinvest dividends, which can significantly increase the overall value of an investor’s portfolio through compounding.
While bonds and other asset classes provide stability, they often offer lower long-term returns than stocks. For example, three-month Treasury bills have returned an average of 3.30% between 1928 and 2023, while 10-year Treasury notes averaged a return of 4.86% over the same period. In contrast, the S&P 500’s return of 9.80% makes it a more attractive option for long-term investors.
Investing in stocks provides access to potential capital appreciation, along with dividends, which can offer an additional source of income and contribute to a portfolio’s growth.
Volatility Is the Price You Pay for Higher Returns
While stocks may offer higher long-term returns, they also come with more risk and volatility. Short-term market fluctuations can lead to significant losses if an investor is forced to sell during a downturn. This is why stocks are considered riskier than bonds, which generally offer lower but more stable returns.
However, stocks tend to outperform other investments over time, as long as investors have the discipline to remain patient and ride out the market’s ups and downs. Studies show that investors who stay invested in the stock market over the long term tend to outperform those who try to time the market.
This is why many financial advisors recommend that investors take a long-term approach to investing in stocks. By staying invested for several years, investors can benefit from the market’s overall upward trend and ride out any short-term downturns.
Advantages of Long-Term Stock Holding:
- Market Timing Becomes Less Important: When you hold stocks for the long term, you are less concerned about short-term price fluctuations and can ride out market downturns.
- Dividends and Compounding: Many stocks pay dividends, which can be reinvested to buy more shares, increasing the overall value of your portfolio.
- Emotional Discipline: Long-term investors are less likely to make emotional decisions based on short-term market movements.
- Lower Taxes: Long-term capital gains taxes are lower than short-term gains, which can result in significant tax savings over time.
Leave a comment