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Long-Term Stock Holding Benefits
Currency Exchange Without High Fees
Long-term investing involves keeping investments for over a year. This approach holds bonds, equities, ETFs, mutual funds, and more. Long-term thinking takes discipline and patience. Investors must be willing to accept risks while waiting for bigger returns.
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Long-term wealth growth is best achieved by investing in and keeping equities. S&P 500 had yearly losses in just 13 years between 1974 and 2023, showing that the stock market generates profits more often than not.
Key Takeaways
Market timing favors long-term stock investments over short-term trades.
Emotional trading hurts investor returns.
S&P 500 investors made money during most 20-year periods.
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Investors who weather market downturns are regarded as good.
Long-term investment reduces expenses and compounds returns.
Better Long-Term Returns
Asset class refers to an investing category. They resemble bonds or stocks. Your ideal asset class relies on your age, risk tolerance, investing goals, and capital. Which asset types are ideal for long-term investors?
Stocks have outperformed most asset types over several decades. From 1928 to 2023, the S&P 500 returned 9.80% geometrically. This beats three-month Treasury bills (T-bills) at 3.30%, 10-year Treasury notes at 4.86%, and gold at 6.55%.
Emerging markets offer the best stock market returns but also the largest risk. This class had a good average yearly return, but short-term swings hurt them. On Sept. 30, 2024, the MSCI Emerging Markets Index had a 10-year annualized return of 4.02%.
Large and small caps have also outperformed. As of Oct. 28, 2024, the Russell 2000 index, which tracks 2,000 small firms, had a 10-year return of 8.39%. By the same day, the large-cap Russell 1000 index had averaged 13.15% during the last decade.
Important
Riskier stocks have generally outperformed cautious ones.
Ride Out Highs and Lows
Stocks are long-term investments. This is partly because equities often decrease 10% to 20% or more in value quickly. Investors can ride out these highs and lows for years or decades to get a higher return.
Since the 1920s, S&P 500 investors have seldom lost money over 20 years.
Even with the Great Depression, Black Monday, the IT boom, and the financial crisis, investors who held the S&P 500 for 20 years would have gained money.
Past performance does not guarantee future returns, but long-term stock investing usually pays off.
Chart displaying 10.47% S&P 500 Index Offers 10-Year A
Less Emotional, More Profitable Decisions
We’re not as calm and sensible as we say. Emotionality is a defect in investor behavior. Many people profess to be long-term investors until the stock market falls, then they withdraw their money to prevent losses.
Investors often sell equities after a comeback. They usually return once most of the gains are made. Buy high, sell low behavior hurts investment returns.
Dalbar’s Quantitative Analysis of Investor Behavior found that the S&P 500 returned 9.65% annually over 30 years ending Dec. 31, 2022. The typical stock fund investor earned 6.81% annually throughout the same period.
This happens for several reasons. Just a few:
Investors worry about regret. When markets fall, people typically follow the hype instead of their judgment. People fear they’ll regret owning stocks and lose more money as they decline in value, so they sell to calm their fears.
Lack of optimism as things change. Market rallies inspire optimism, while market declines do not. Short-term shocks, including economic ones, can trigger market swings. Remember that these disruptions usually last a short time and will soon resolve.
By trying to time the market too often, stock market enthusiasts hurt their prospects of success. A straightforward long-term buy-and-hold strategy would have done better.
Cheaper Capital Gains Tax
Profits from selling capital assets are capital gains. Furniture and investments like stocks, bonds, and real estate are included.
An investor who sells a financial security after less than a year pays regular income taxes on profits. We call them short-term capital gains. This tax rate might reach 37% depending on the individual’s AGI.
Long-term capital gains occur from selling securities held for longer than a year. Gains are taxed up to 20%. Lower-tax investors may qualify for 0% long-term capital gains tax.
More Economical
Money is a major advantage of long-term investing. Longer stock holdings reduce costs, making them cheaper than frequent buying and selling. This all costs how much?
The last portion mentioned tax savings. Stock sales profits must be reported to the IRS. That raises your tax bill, costing you extra. Remember that short-term capital gains cost more than long-term gains.
Trading or transaction costs follow. Your account type and investment firm determine your payment. When buying and selling through a broker, a commission is removed, while markups are levied when selling through their inventory. Your account incurs these charges while trading stocks. Your portfolio balance will decrease with each sell.
Fee-free internet brokerages are used by many active investors in 2024. You may not pay for part or all deals in certain instances. However, investors must measure the time they spend on trades against the performance difference between an active and a buy-and-hold strategy.
