When it comes to investing for the future, there are many paths you can lead on. Often individuals are a bit skeptical when they hear about a longterm investment strategy. If you invest at the right stick and hold on for longer, it will help you gain maximized returns. Your long-term investments can include buying different investment instruments like bonds, mutual funds, stocks, and even exchange-traded funds (ETFs). This blog will walk you through the benefits of long-term investment with stocks and more.
Though, long-term investment requires a lot of patience and discipline because investors will have to take a certain amount of risk when they wait for receiving higher rewards from the stocks over the years. While there is no determined formula for investors to succeed in long-term investment, you are bound to make mistakes but you will have ample time to explore and learn different patterns and market strategies.
Investing in stocks and holding on to them for several years is one of the ideal ways to grow your wealth for your secured future. For instance, the S&P 500 experienced loss in 11 out of 47 years i.e. 1975 to 2022. This indicates that the stock market has been generating returns for many investors who invested for as good as 20 years than the ones who sold their stocks within 1 year of buying. Ideally, investing for more than 10-15 years is suggested by experts to gain exciting rewards.
Do you want to learn more about the benefits of investing in stocks? Wait, no more! We have listed below a few essential factors influencing the benefits of long-term investing. Also, we will solve your concerns like How long to hold stocks? What are the ideal stocks for long-term investment and more.
Better returns with long-term investment in stocks
Have you heard about the term - Class Asset? It is no difficult jargon but refers to a specific category of investment. The class asset shares the same qualities and characteristics as fixed-income assets, bonds, or equities, which are loosely termed stocks. Often individuals have common concerns: how do I select my ideal class asset? It will depend on your age, your tolerance level for risk, the capital amount you have, and lastly your investment goals.
If we look deeper into several decades of class asset returns, we will find that most of the stocks have outperformed all other asset classes. For instance, S&P 500 returned an average of 11.82% per year between 1928 and 2021. These statistics compare the 3.33% return of the three-month US Treasury bills and the 5.11% of 10-year Treasury notes.
Emerging markets have the potential of offering the highest return in the equity markets, but don't forget that with the benefit of long-term investing, you need to face high-risk factors as well. Over the past few years, this class has earned great returns annually, though short-term fluctuations have inversely impacted their performance. For example, the 10-year annual return of the MSCI emerging return index was around 2.89% as of April 2022.
Additionally, small and large caps have also delivered more than average returns. For example, the 10-year return for the Russell 2000 index (which measures the performance of 2000 companies) was 10.15%. Large-cap Russell 2000 index had an average return of 13.57% for the last decade till the date of May 2022.
Top stocks for long-term investments
Are you confused about selecting the ideal stocks for long-term investment? We can understand your struggle, especially if you are a new entrant in this industry, finding the right stock can feel overwhelming. There are several factors that you must consider when you begin purchasing stocks. Check on elements like your investment goals, age, and risk tolerance. When you figure out the 3 pillars of your investment journey, creating and maintaining a portfolio shouldn't make you feel troublesome.
To make it a bit easy for you, we are listing a general guide to assist you purchase the right stocks for your long-term investment journey.
Select index funds - ETFs focused on tracking specific indexes like S&P 500 or Russell 1000 ad it is traded like stocks. Though, these funds have lower costs and you don't have to select the specific companies in which you desire to invest in. Lastly, index funds give you a similar return to that of indexes they track.
This type of stock helps in adding value to your portfolio, especially when you consider reinvesting your dividends.
Invest in Companies with High Potential
Growth stocks tend to associate with companies that can generate higher revenue faster than others. Also, they are known for delivering better earning reports for investors. Note that, the high degree of growth brings along a certain rate of risk factors. It is always advised to consult a professional especially when you are new to investment.
Benefits of long-Term Investments
Investing in stocks offers you a range of benefits of long-term investments to fulfill your financial goals and achieve financial independence with handsome returns in the long run. Let’s have a closer look at the perks that you can enjoy by holding on to the stocks for a longer time.
Trade Through the Highs and Lows of the Market
Stocks are known for long-term investments, though it is not unknown that stocks tend to drop their value by 10%-20% over a short period. Investors get the opportunity to rise the highs and lows of the stocks over the years or even decades to generate a better or maximized long-term return.
If you look at the stock market returns since the 1920s, rarely individuals have lost their money by investing in S&P 500 for over 20 years. Even if you consider a few setbacks, like depression, Black Monday, Tech Bubble, or Financial crisis investors have experienced gains out of their investment in the S&P 500 and held it for 20 years straight without any interruption or hurdles.
Though, past results of the stocks cannot guarantee your future returns from stock investments. Though, the evaluation of the past few years suggests that long-term investments in stocks yield better results with high returns if you hold the stocks for a few years.
Lower Capital Gains and Tax Rate
Profits earned from selling off any capital assets end up serving as capital gains for investors. This can include personal assets like furniture or investments like stock, real estate, and bonds.
Investors who consider selling securities within one year of buying stocks and gets any gains in exchange will be taxed as ordinary income, and this income earned is termed short-term capital gains. Furthermore, depending on the investor’s adjusted gross income, the tax rate can be as high as 37%.
Remember, any securities sold after being held for more than a year will result in long-term capital gains. Usually, these gains are taxed at a minimum rate of 20%. Investors, who have a low income bracket can be qualified for ) a 0% tax rate for long-term gains.
One of the main benefits of investing in stocks for the long term is earning high returns for investors. Keeping your stocks or holding your stocks for a longer time in your portfolio is proven to be more cost-effective than your regular buying and selling stocks. This is because, the longer you hold your stocks, the fewer fees you will have to pay. Though, you must be wondering what is the exact cost of long-term investment.
As we discussed above, by investing long-term you will save your taxes significantly. Any gains received through stock sales must be reported to the Internal Revenue Service (IRS). This will increase your tax liability, which means paying more money out of your pocket to the USA Government. Remember, short-term vestments will cost you more than long-term investments in stocks.
Additionally, trading or transaction fees can eat up your money when you focus only on short-term investing. How much fees to pay will vary depending on your account and investment type, and in the end, this factor is looked at by the investment firms that usually manage your portfolio. For example, you will be charged a commission where the former is deducted when you buy or sell stocks from a broker.
Whereas, markups are charged when your sale of the stock is made directly through their inventory, and these costs are charged to your account whenever you trade stocks.
Compound Interests with Dividend Stocks
Dividends are your corporate profits usually distributed by established companies with a constant record of success. These stocks are termed blue chips or defensive stocks. Defensive stocks are companies that perform well irrespective of how the economy flow is or how the stock market drops
These companies tend to pay regular dividends to their shareholders - usually quarterly, which means individuals get an opportunity to hold a share in their company. While you receive dividends in the form of cash payments, it may be tempting to spend it right away but you have the biggest reason to not reinvest those dividends in the company that assures you to pay instead.
Additionally, if you own any mutual funds or bonds you will know exactly how compound interest can impact your investments. If you are new to investments, you might be unaware of this term. Compound interest is any interest calculated on the principal balance of your portfolio and any other early interest that you have earned.
In short, it means any interest you earn in the form of stocks or dividends will accumulate and compound over time, which results in an increasing amount in your account in a few years.
A Key to Mastering Market Timings
Let’s be honest, investors are not as calm or have rational behavior with investing as they claim to be. One of the flaws observed in every investor is that they tend to be emotional. Often investors tend to withdraw their money as soon as they see a fall in the stock market to avoid any further losses.
Many investors fail to hold on to the stocks when a rebound occurs in the market. Most investors jump back when most of the gains have already been achieved by their investors. This investment behavior - buy high, sell low usually disturbs gaining high returns.
As per the Dalbar Quantitative Analysis of Investor Behavior study, S&P 500 has an average annual return of 6% during 20 years ending in Dec 2019. During the same tenure, other investors experienced an annual return of 2.5%.
Why does this happen? Come let’s understand a few factors.
- Investors have fear or a sense of regret. Individuals often fail to trust their judgment and end up following the hype in the market especially the value of the stock drops. In the end, the reason why most investors end up selling stocks early is because they think they will regret holding onto the stock and will lose money as the value of the stock has dropped.
- Optimistic behavior is okay when your stock rises its value, but the opposite behavior is expected when everything feels sour. Market volatility is bound to happen, and fluctuations due to short-term stock prices are due to changes in the economy. It is important to remember that these fluctuations are short-term, and one must not react to such circumstances.
Other benefits of investing in stocks
Investing in stocks is risky but also beneficial to secure capital for your retired life or to fulfill your financial goals. Apart from the above-mentioned factors, let’s explore a few smart ways that stock investment can help you achieve financial independence with significant wealth growth.
Your risk factor drops with long-term investment
When you try to dive out of the market to achieve short-term gains could lead you in missing the biggest results and returns that long-term investors have already achieved. If you miss just 30 days in 20 years and you lose your opportunity to gain a high return, and instead you end up receiving less than 20%. If you stay invested for a log time, your risk of losing big gains will reduce.
You can easily correct your investment mistakes
One common benefit of long-term investment is it lets you correct all your investment mistakes over time. This way you can still stick with the companies for a longer time that promises strong growth and high returns. Even if you make mistakes during this time by investing in companies who fail to deliver you your expected returns, you have time to switch and have your other investing options.
How Long to Hold Stocks?
With any asset or securities, it is advised to hold on to stocks for a minimum of 12 months from buying to achieve one common benefit of long-term investment which is receiving high returns, dividends, and more. If you fail to hold on to your stocks for less than 1 year you will not be eligible to fall under the category of long-term investor and would not be able to grab on a few exciting perks.
Tax Rates and Benefits of Long-Term Investments
The IRS implies tax on short-term and long-term investment gains. For short-term capital gains are taxed on assets that are sold within 1 year of purchase. Whereas, long-term capital gains are taxed on the selling of stocks that are held for more than 1 year.
According to the IRS, short-term gains are considered ordinary income, which means you will be taxed at a regular income tax rate of 37% (as per your tax bracket)Whereas, long-term gains are subject to only 15-20% rate tax.
Note that the tax rate will depend on your overall rate of gross income.
Investors who invest in stocks for the long term can benefit from various elements. If you have better trading experience, riding through the ups and downs of the market, save yourself from high tax rates, and reduce your investment cost altogether.
Frequently Asked Questions
Yes, you can choose to sell your stocks right after purchasing it. This is known as a flip and quick investment strategy. Though, it is important to consider factors like transaction fees, market conditions, and potential short-term capital gains taxes before executing such a strategy. If you are someone who wants long-term gains then day trading, quick buying, and selling would not be the ideal strategy for you.
Yes, your long-term investment strategy must evolve, based on changes in your financial situation, goals, and stock market conditions. Periodic adjustments can help optimize your portfolio for continued growth and gain high returns.