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4 Benefits of Holding Stocks for the Long Term By David Dierking

Originally posted on Ivestopedia.com

Many market experts suggest holding
stocks for the long term. The Standard &
Poor’s (S&P) 500 Index has experienced
losses in 10 of the 40 years from 1975 to
2015, making stock market returns quite
volatile in shorter time frames. However,
investors have historically experienced a
much higher rate of success over the
longer term.

In an ultra-low interest rate environment,
investors may be tempted to dabble in stocks to boost short-term returns, but it makes more
sense to hold on to stocks for the long term.

Better Long-Term Returns

An examination of several decades of historical asset class returns shows that stocks have
outperformed most other asset classes. Using the 87-year period from 1928 to 2015, the S&P
500 has returned an average of 9.5% per year. This compares favorably to the 3.5% return of
three-month Treasury bills and the 5% return of 10-year Treasury notes.
While the stock market has outperformed other types of securities, riskier equity classes have
historically delivered higher returns than their more conservative counterparts. Emerging
markets have some of the highest return potential in the equity markets, but also carry the
highest degree of risk. Short-term fluctuations can be significant, but this class has historically
earned 12 to 13% average annual returns.

Small caps have also delivered above-average returns. Conversely, large-cap stocks have
been on the lower end of returns, averaging roughly 9% per year.

Opportunity to Ride Out Highs and Lows

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

Looking back at stock market returns since the 1920s, individuals have never lost money
investing in the S&P 500 for a 20-year time period. Even considering setbacks like 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.

Investors Are Poor Market Timers

One of the inherent flaws in investor behavior is the tendency to be emotional. Many
individuals claim to be long-term investors up until the stock market begins falling, which is
when they tend to withdraw money for fear of additional losses. Many of these same investors
fail to be invested in stocks when a rebound occurs, and 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.

According to Dalbar’s 2015 Quantitative Analysis of Investor Behavior study, the S&P 500 had
an average annual return of roughly 10% during the 20-year period ending Dec. 31, 2014.
During the same time frame, the average investor experienced an average annual return of
just 2.5%. Investors who pay too much attention to the stock market tend to handicap their
chances of success by trying to time the market too frequently. A simple long-term buy-andhold
strategy would have yielded far better results.

Lower Capital Gains Tax Rate

An investor who 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, this tax rate could be
as high as 39.6%. Those securities sold that have been held for longer than one year see any
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.

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