Long Term Stocks for Long Term Profit

Long Term Stocks for Long Term Profit

Oct 25, 2019


If you are an investor and looking for market gains and success, the best thing for you to do is to expand your time horizon

Short-term investments do profit in the immediate term, but many times, unexpected events can derail your position. 

  • If you pick ideas from the best long-term stocks in the market, and this can also include penny stocks to buy long term, then you have the chance of improving your odds significantly

Investing in a financially sound company helps in the trading dynamics and even when unfavorable news events can negatively impact a company.

However, in the long run, time evens out all volatility. 

In order to get the most out of long-term investments, investors should focus on the corporate growth prospects, sectoral growth, and financial performances, amongst other factors. 


What are Long Term Stocks? 

As per the IRS, stocks are considered to be capital assets.

The market value of stocks can rise or fall, without involving any taxes, but once the investor decides to sell the stock, the IRS gets involved.

  • When you sell your stock, you either have a capital gain or a capital loss, which depends upon whether you sold your stock for more or less than what you bought it for

There are different rates of taxes that apply in the short-term and long-term capital gains, which is why it is crucial to keep track of your sale and purchase dates.


Holding Period

The capital gains are classified by the IRS on the stock transactions as either short term or long term, depending on the length of time you have owned the stock for before the sale.

If the stock is held for a year or less before a sale, then your gain or loss would be short term.

The sale transaction for a stock which has been held for more than a year results in a long-term capital gain or a loss.



Difference Between Short Term and Long-term Investment

A long-term investment strategy means there is a higher probability of maximizing your returns over a 10-year period, as compared to a short-term investment strategy, which can bring profits in just a few years.

A short-term investment is usually held for three years or less.

  • Examples of long-term investments are index funds, vehicles, etc.
  • Examples of short-term investments are certificates of deposit, money market funds, etc.

Many investors like to play in the market and speculate with their day trading, but it is quite a risky business, and one has to be educated enough and do thorough research before they venture into short-term investments or trading.

  • For most people, it is safer and more comfortable to plan and have investments in long-term stocks.


Why You Should Hold Stocks for Long Term

Many financial experts suggest that stocks should be held for the long term.

There have been losses in the S&P 500 indexes in 10 years out of fifty from 1975 to 2015, which makes stock market returns pretty volatile when it comes to the short term.

  • Most of the investors have also experienced better returns and greater success when they have held stocks for long.



Better Long-term Returns

If you look at historical data of asset class returns from the past several decades, it is easy to see that the stocks have performed better than most other asset classes.

  • When considering an 87-year period from 1928 to 2015, the S&P 500 has given a return of 9.5% per annum.
  • This is compared to the 3.5% return from 3-month treasury bills and 5% return of 10-year treasury notes.

While the stock market performs better than other types of securities, the risky assets generally do give higher returns than the less risky ones.

Long-term investments are preferred because short-term fluctuations are usually there, which can be significant to make a tremendous impact on the returns.

The small-cap generally give better returns on average while the large-cap stocks provide lower returns and average around 9% per annum.


Gives an Opportunity to Even Out the Highs and the Lows

Stocks are usually considered as long-term investments, and it is not unusual for stocks to drop 10-20% or sometimes even more in value over a shorter time frame.


Over the period of many years, sometimes even decades, investors have the opportunity to even out the high and the lows and are able to generate better returns in the long run.

Even when one considers the stock returns over the years, it does suggest that long-term investments yield positive results if they are given enough time.


Investors are Bad Market Timers

One of the flaws that investors have is that they have a tendency for being emotional.

A lot of people claim to be long-term investors, until the market begins to fall, which is when they end up withdrawing their investment in fear not to incur additional losses.

A lot of the same investors fail to invest in stocks when a rebound occurs and only jump back when the majority of their gains have been achieved.

This behavior of buying high and sell low ends up crippling the investor returns.

  • Most investors pay too much attention to the stock market to reduce their chances of success by timing the market frequently, while a simple strategy of buy and hold would be able to give better returns.


Lower Rate of Tax for Capital Gains

If an investor sells his or her security within one year of purchasing it, any capital gains that they earn on that security is treated as ordinary income.

  • It depends on the individual's adjusted gross income, which means the tax rate can be as high as 39.6%.

The securities that are held for more than a year, when they are sold, the gains are taxed at a maximum rate of 20%.

In fact, those investors who fall in a lower tax bracket can even qualify for a 0% long term capital gains tax.


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