Importance of Long-Term Investing
A common term tossed around in the investing industry is “long-term investing,” but what is “long-term” and why is it important? In the eyes of the Internal Revenue Service, long-term capital gain treatment is afforded to those assets held for more than one year. When investors discuss long-term investing, they are talking about 10-20-30 years of investing in the market. There are many benefits to long-term investing, a few of which are highlighted below.
Favorable Capital Gains Tax Rate
When you hold your investments for less than one year, your gain will be taxed as ordinary income. Depending on your adjusted gross income, this tax could be as high as 37%. If you hold those securities for more than one year, your gains are taxed at the favorable capital gain tax rate of 0%, 15% or 20%. Investors who are in the lowest income tax brackets qualify for 0% capital gain tax rate.
Ride out Market Volatility
The stock market provides a much better opportunity for long-term investors than short-term investors. If you have experienced a drop in the market, you know it can be stressful. Your instincts tell you to sell your investments to avoid an even greater drop, but by selling you make your losses real. That is the last thing you should do. By adopting a long-term investing strategy, you keep your money invested in the market, ride out the bad days and eventually, watch your value rise over the long-term. As mentioned in previous blogs, if you invest in the S&P 500 and hold for 20 or more years, historically you have a 100% chance of positive returns.
Do not miss the best market days
When you try to time the market, you can miss the best days in the market. As outlined in the chart below by Putnam Investments, if you invested $10,000 in the S&P 500 on December 31, 2005 and held it for 15 years, your $10,000 grew to $41,100. But if you tried to time the market and missed the 10 best days, your return dropped to $18,829. If you missed the best 40 days, you lost money.
This is a great example on how trying to time the market is more risky and less advantageous than investing in the market long-term. As the saying goes, “It is not about timing the market, but time in the market.”
There is no right or wrong time to start investing in the stock market, but when you start, invest for the long-term. If you have any questions about long-term investing, contact your advisor or give us a call at (513) 271-6777.