Many market experts recommend holding stocks for the long term, as stock market returns can be very volatile in shorter time frames.
Investors have historically experienced a much higher rate of success over the longer term, which is a benefit of having a plan and sticking to it, especially in volatile markets.
In times of high volatility, some investors may be tempted to trade in stocks frequently to boost short-term returns. When an investor tries to time the market, they have to try and judge the lowest low to buy and the highest high to sell. I don’t even think a crystal ball can make that many right decisions.
It’s not timing the market that leads to higher overall returns, it is time in the market.
The main reason to buy and hold stocks over the long-term is that long-term investments almost always outperform the market when compared to investors that try to time their investments.
Emotional trading tends to get in the way of investor returns. Long-term investing takes the emotion out of short term volatility.
There are tax benefits of long-term investing.
Stocks are considered to be long-term investments. This is, in part, because stocks can drop 10% to 20% or more in value over a short period of time. Over a period of many years or even decades, investors have the opportunity to ride out these highs and lows to generate a better long-term return. Riskier equity classes, although more volatile, can deliver higher returns when compared to more conservative equities over time.
Looking back at stock market returns since the 1920s, individuals have not lost money investing in the S&P 500 for a rolling 20-year time period
1. Even considering setbacks, such as the Great Depression, Black Monday, the tech bubble, and the financial crisis, investors would have experienced gains had they made an investment in the S&P 500 and held it uninterrupted for 20 years.
While past results are no guarantee of future returns, it does suggest that long-term investing in stocks generally yields positive results, if given enough time.
The Pitfalls of Emotional Investing
One of the inherent flaws in investor behavior is the tendency to be emotional. Many investors claim to be long-term investors up until the time the stock market begins going down. That is when their emotions tend to take over and they withdraw money for fear of additional losses. These same emotions keep investors from being invested in stocks when the markets start to go back up. More times than not the investor will jump back in only when most of the gains have already been achieved. This type of “buy high, sell low” behavior tends to cripple investor returns. Investors without a plan who pay too much attention to the day to day changes in the stock market tend to handicap their chances of success by trying to time the market too frequently.
A simple long-term buy and hold strategy could yield far better results without the daily stress of the market ups and downs.
Additional Benefits of Long-Term Investment Planning
Another advantage for a long-term investor is a tax advantage. An investor that sells a security within one calendar year of buying it gets any gains taxed as ordinary income. Depending on the individual’s adjusted gross income (AGI), this tax rate could be as high as 35.7%. Securities sold that were held for longer than one year see capital gains taxed at a maximum rate of just 20%. Investors in lower tax brackets may even qualify for a 0% long-term capital gains tax rate.
Pauline Quinn, MSAPM
Registered Principal, RJFS
Morey & Quinn Wealth Partners
Phone: 402.502.9900
Toll Free: 877.541.6593
11225 Davenport St,
Suite 109 Omaha, NE 68154
1 Source:
https://www.macrotrends.net/2526/sp-500-historical-annual-returns