Long Term Investing in Stocks: What are the Benefits of Long-Term Investing?

Both long term and short term investments each come with their own perks and risks. Becoming a long term investor means that you are willing to leave your money tied up for a longer period of time which has the potentials of yielding higher rewards. Long term investments come at risk because, during the time span of the investment, the markets would experience their best and worst moments, and the investors must be patient until the end of the investment.

What are Long-Term Investments?

A long-term investment is an account that a company intends to hold for more than a year. This includes stocks, bonds, real estate, cash, or any other available investment. The long term account appears on the asset side on a company’s balance sheet. Companies usually separate their long term investment accounts from their short term investment accounts, that way, the company would be able to identify what assets would be sold from time to time, and the assets that would be held for a long time with little or no chances of getting sold.

Understanding Long-Term Investments

A holding company has the liberty to classify its investments as short term or long term after it purchases stocks or bonds. In turn, this classification determines the value placed on each asset on the company’s balance sheet. Nevertheless, the increases in the value of each asset are not known until sales have been made.

The most common type of long term investments that occur are those that occur between one firm and the other. As a means of gaining significant influence over another company without owning the majority of voting shares, a company can invest largely in a target company in the long term.

Quite a few investors prefer long term investment over short term because long term is less risky than short term investing. There’s also the issue of volatility which tends to rock market prices from time to time. In most cases, investments with high volatility are more prone to risks or have higher risk rates because of the instability of their prices. Though, short term investments are more volatile compared to long term investments. It is important to note that lower volatility does not necessarily apply to long term investments. A short term investment, though highly volatile during daily trading can still show long term growth patterns.

Concerning long term investing, the major benefit can be seen in its correlation between volatility and time. Of a proven fact, long term investments show lower volatility than short term investments or those held for a shorter period of time. Assets such as stocks have higher short-term volatility and high potentials of turning in higher returns over longer periods compared to less volatile assets like money markets.

Before you become a long term investor, there are certain things to put into consideration such as your risk tolerance and investment strategies. Your risk tolerance would help you decide whether or not you are willing to continue with long term investing or simply opt for short term. You can also develop investing strategies around your risk tolerance and desired returns. Strategies such as buying and holding, and tax benefits, alongside growth stocks or long-maturity bonds type of investments.

‘Held to Maturity’

An investment can be considered “held to maturity” if an investor decides to hold an investment until it has matured and the company has the ability to support it. Hence, the investment is recorded at cost and all discounts or premiums will be amortized during the timespan of the investment. Usually, long term investments are written down to properly show any impaired values. Though there are hardly any allowances for adjustment due to temporary market fluctuations.  Not all investments can be classified as “held to maturity” like equity securities since every investment must have an end date.

Real-life example:

In 2002, eBay purchased PayPal. Over time, PayPal grew significantly in its infrastructure and user base. By 2015, PayPal was spun out of eBay to operate as an entity on its own with a five-year agreement to continue operating for eBay. PayPal was able to grow substantially over time with eBay’s investment, while eBay also benefitted by owning the top global payment processing company for nearly two decades.

Benefits of Long Term Investing

Fewer risks: As earlier stated, long term investments are less risky than short term investments. It also reduces your chances of missing out on big gains. According to a JP Morgan 2014 study, using data gotten from the largest moves of the S&P 500 from Dec.31, 1993 to Dec 31, 2013, it showed that investors of the broad-based index who stayed invested all through the 20 years would have netted 483% returns. Assuming an investor missed 10 biggest moves during that timespan, the investor would have ended up with only 191% compared to the estimated 483%.

Tax advantages: Most times, long term gains are taxed at rates below the investor’s income tax bracket, whereas, short term gains are taxed as regular income. If you buy and sell a security within 365 days or 12 months, it would be regarded as regular income. Basically, you’d pay less as a long term investor compared to if you’re an active trader. Short term traders hold their investments for 12 months, hence, they pay tax at a marginal rate of 10% to 39.6%. While long term investors pay taxes at a marginal rate of 0% to 20%, depending on the income.

Compounding: Holding stocks over long periods allows investors to take advantage of compounding (the ability to reinvest dividends or profits). No matter how little a dividend’s percentage is, it is still able to grow over a longer period of time and generate more yields. As a long term investor, time is of great benefit as a dividend as low as 2% or 3% can make a lot of difference at the investment maturity. More so, it is better even better when the dividend gets reinvested back into your investment. You’re the potential of your investment returns would double by its maturity date.

Portfolio diversification: Every investor should own several investments in a single portfolio as a means of promoting diversification. That way, the losses in one investment would be offset by the gains in other investments. Including a long term investment in your portfolio would ensure that your portfolio remains profitable and positive by all means. Long term stocks and securities will help your portfolio stay diverse and keep your money sheltered. It would also help you keep your mind off withdrawing your long term investment in the midst of market volatility and focusing on other investments.

Cut down expenses: with long term investing, expenses such as transaction costs associated with active trading are being cut down. Commission costs may be relatively inexpensive and differ by broker, however, it is not uncommon to find traders and investors spending thousands of dollars per year on commission costs. Long term investing allows investors to save up on commission costs since they do not actively trade. Investors become less concerned with $10 commission costs. Some mutual funds go as far as offering investors the opportunity to defer sales charges if they hold an investment for a long period.

Cuts down anxiety: Many day traders or short term investors literally tend to experience sleepless nights. Long-term investments may have its own panic sessions like when high volatility rocks the markets, but investors will not be burdened with the thoughts of their portfolio falling or rising overnight. Considering the fact that the stock market is volatile, short term investors always have to be on the look to ensure that their portfolios are at the lowest volatility minimum by all means. They also have to be always alert to predict the market and price movements to know when to buy, hold, or sell. All these can eventually build stress levels among active traders. There are numerous illnesses that are triggered by stress and short-term investing can be one of the stress-inducing activities a person can indulge in. Unfortunately, not many investors see this as a health threat.

Historically proven: Countlessly, history has shown that investing over the long term has a higher chance of success than investing short term. Investors that do not have the patience or tolerance for long term investments, in a bid to “beat the system” and get rich quick, often crash and burn. As a long term investor, you must be willing to put aside a certain amount of money for a long period of time. Since investments held for longer periods tend to weather the stormiest of the markets at different times—stock market crash, high volatility, economic declines, etc. -- the investor must remain focus and not panic in the midst of it all. It is quite common to see some investors panic when reports of the market falling begin to circulate. This has often pushed some investors into panic selling and bringing their long term investments to an abrupt end. Nonetheless, it has been historically proven that staying focused and invested in the market for a long period of time regardless of market instability would eventually pay off. Big shot investors like Warren Buffet and Michael Burry are good examples of this.

Saving for other reasons: Investing for a longer period would help you save for other important things such as retirement, education, a house, a car, or any other thing that matters the most to you.

Note: Emphatically, investing long term also comes with its risks and downsides. It is important to note that stocks have a 50-50 chance of rising or falling. They can drop to the lowest minimum of $0, but they can rise infinitely. It is a lot safer to still diversify your portfolio to avoid a complete loss. However, you are most likely going to make more money if you align your portfolio for long term. There’s a good probability that your portfolio can grow in value over long periods, especially when your focus is on high-value businesses.