Benefits of Holding Stocks for the Long Term

Holding stocks for the long term means holding on to those investments for a year or more. It requires patience and disciple to do long term investing. It is proven to be a keyway to grow wealth over time. In this article, we will go over six benefits of holding stocks for the long term.

1. Better Long Term Results

Though past performance does not guarantee future results, in general holding on to your stocks for more than a year will result in higher returns. For example, between 1928 and 2022 the S&P 500 returned an average of 9.80%. Whereas during that same period T-Bills only had 3.30% and gold had an average return of 6.55%

2. Allows You to Ride Out Highs and Lows

Stocks have good times and bad times. You need to be prepared for times when your stock may drop in value, up to 10% or 20%. Holding stocks for the long term allows you to ride out lows over years or decades to generate better results. Though nothing is guaranteed stocks generally yield positive results if they are given enough time.

3. Takes Emotion Out of Decisions

One of the flaws of human investing is the tendency to make decisions based purely on emotions, not facts. Many pull out their stocks when the market begins to fall due to fear. But they fail to reinvest in time when the market rebounds. This often results in a loss. This can be avoided by utilizing the long term holding strategy.

4. Lower Capital Gains Tax Rate

Any profits you make from the sale of stocks are known as capital gains. You must pay capital gains tax on these funds. There are both short term and long term capital gains tax rates. Short term capital gains tax results when you sell a stock within one calendar year of its purchase. This tax rate is equal to your ordinary income tax rate, which for some people can be as high as 37%. If you hold your stock for more than a year you are subject to long term capital gains tax. This can range from 20% to 0% depending on your tax bracket. For most people, long term capital gains tax is less than the short term capital gains tax rate.

5. It is More Cost Effective

If you are buying and selling stocks on a regular basis, you subject yourself to transaction fees and commissions. The less you trade, by holding stocks for the long term, you avoid these excessive fees.

6. Compound Year Earnings with Dividend Stocks

Dividends are distributions of corporate profits. They are usually issued by blue chip companies. Dividends are typically issued every quarter. It is good investment practice to reinvest your dividends. The compounding effect of this helps increase your overall wealth over the long run.

Buying and Holding Stocks for the Long Term

How you manage your stocks will be based on your age, risk tolerance and investment goals. You will want to choose high quality stocks that you can hold on to for the long term. This could include index funds and dividend paying stocks. Utilizing an investment advisor can help better hone in the profitability of your stock portfolio.

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