Benefits of Holding Stocks for the Long Term

A long-term investment strategy entails holding investments for more than a full year. 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 of the last 50 years, dating back to 1974, demonstrating that the stock market generates returns much more often than it doesn't.

Better Long-Term Returns

The term asset class refers to a specific category of investments. They share the same characteristics and qualities, such as fixed-income assets (bonds) or equities, which are commonly called stocks. The asset class that's best for you depends on several factors, including your age, risk profile and tolerance, investment goals, and the amount of capital you have. But which asset classes are best for long-term investors?

If we look at several decades of asset class returns, we find that stocks have generally outperformed almost all other asset classes. The S&P 500 returned a geometric average of 9.80% per year between 1928 and 2023. This compares favorably to the 3.30% return of three-month Treasury bills (T-bills), the 4.86% return of 10-year Treasury notes, and the 6.55% return of gold, to name a few.

Emerging markets have some of the highest return potentials in the equity markets, but also carry the highest degree of risk. This class historically earned high average annual returns but short-term fluctuations have impacted their performance. For instance, the 10-year annualized return of the MSCI Emerging Markets Index was 2.66% as of Dec. 29, 2023.

Small and large caps have also delivered above-average returns. For instance, the 10-year return for the Russell 2000 index, which measures the performance of 2,000 small companies, was 7.08% as of Jan. 26, 2024.4 The large-cap Russell 1000 index had an average return of 12.39% for the last 10 years as of the same date.

You Ride Out Highs and Lows

Stocks are considered long-term investments. This is, in part, because it's not unusual for stocks to drop 10% to 20% or more in value over a shorter period of time. Investors have the opportunity to ride out some of these highs and lows over a period of many years or even decades to generate a better long-term return.

Looking back at stock market returns since the 1920s, individuals have rarely lost money investing in the S&P 500 for a 20-year time period. 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.

Decisions May Be Less Emotional, More Lucrative

Let's face it, we're not as calm and rational as we claim to be. In fact, one of the inherent flaws in investor behavior is the tendency to be emotional. Many individuals claim to be long-term investors until the stock market begins falling, which is when they tend to withdraw their money to avoid additional losses.

Many investors fail to remain invested in stocks when a rebound occurs. In fact, they tend to 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.

There are a few reasons why this happens. Here are just a couple of them:

• Investors have a fear of regret. People often fail to trust their own judgment and follow the hype instead, especially when markets drop. People tend to fall into the trap that they'll regret holding onto stocks and lose a lot more money because the stocks drop in value so they end up selling their holdings to assuage that fear.

• A sense of pessimism when things change. Optimism prevails during market rallies but the opposite is true when things turn sour. The market may experience fluctuations because of short-term surprise shocks, such as those related to the economy. But it's important to remember that these upsets are often short-lived and things will very likely turn around.

Lower Capital Gains Tax Rate

Profits that result from the sale of any capital assets end up in a capital gain. This includes any personal assets, such as furniture, or investments like stocks, bonds, and real estate.

An investor who sells a security within one calendar year of buying it gets hit with taxes on any gains at a rate that's the same as for ordinary income. These are referred to as short-term capital gains. Depending on the individual's adjusted gross income (AGI), this tax rate could be as high as 37%.

Any securities that are sold after being held for more than a year result in long-term capital gains. The gains are 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.