The stock market offers excellent investment opportunities, many of which provide an impressive return on investment (ROI). As an investor, you have the choice of developing a short-term or long-term investment strategy. While both investment options have its pros and cons, long-term investments offer several ideal benefits that short-term investments just can't provide. Here's a look at the top six reasons why it is smart to invest in the stock market for long-term returns.
1. Everyone Can Do It
One of the best advantages of long-term investing is that everyone can do it. You don't need to have an in-depth understanding of the stock market. You don't have to learn the various trading styles. You don't even have to track the stock market every day. You can find success as a long-term investor just by understanding exactly and by working with an experienced stockbroker.
2. Decreases Risk Level
Studies show that long-term investments yield a higher rate of success than short-term investments. According to a , investors who make long-term investments of at least 20 years in the broad-based index yield a 483 percent return on their investment. Short-term investors, on the other hand, who missed just 10 big stock opportunities over 20 years yield a return on their investment of just 191 percent.
3. Avoid Impulse Investment
Unless you are an experienced investor, it can be difficult not to let your emotions rule your investment decisions. When you wake up and see one of your stocks took a nosedive in the market, you may let your emotions tempt you to sell the stock immediately. If this stock recovers, you will lose money by selling it at a low point. Investing in a long-term strategy helps you to avoid these impulse decisions.
4. Reduces Tax Burden
Another great advantage of long-term investments is the you can achieve. Short-term investors who hold their investment for 365 days or less, must report their profits as earnings. Depending on your specific income level, you could be taxed anywhere from 10 to 39.6 percent. Long-term investors, on the other hand, pay capital gains tax on their stock investments, which can range between zero and 20 percent.
5. Compounding Advantage
The goal of long-term investment is to grow your portfolio over 10, 20, or 30 years — or even longer. Using this strategy allows you to take advantage of compounding your profits. Since your goal is to make money over a longer period of time, you can compound, or reinvest, your profits to purchase additional stocks, therefore expanding your portfolio.
6. Pay Lower Commission Fees
When you are an active trader focusing on short-term investments, you easily can spend thousands of dollars annually just on commission's fees. Since long-term investing is less demanding, stockbrokers don't charge as much. You can expect to pay a commission fee of around $20 a few times a year when requesting basic changes to your investment plan.
As you can see, long-term stock options offer a wide range of benefits. It's important that you develop a long-term investment plan and work with an experienced stockbroker. This type of strategy will ensure that you realize long-term returns on your stock market investment.