The S&P 500 has averaged 9.8% annual returns since 1928, far outperforming bonds or gold.
Emotional trading reduces returns, but disciplined long-term investors capture compounding and growth.
Lower taxes, reduced fees, and dividend reinvestment make long-term strategies more cost-efficient.
The stock market has many ways to invest, but the key to creating wealth is to be patient. Although many people chase quick profits, it is well documented that holding quality stocks for the long term provides superior results.
If you are disciplined, you will not only reduce a portfolio's volatility but also will be using compounding, lower tax rates, and lower costs to create greater stock market returns over time.
A long-term investment strategy refers to holding investments for more than one year, such as securities, exchange-traded funds (ETFs), mutual funds, and bonds. Being disciplined, patient, and able to tolerate short-term fluctuations in exchange for larger gains later.
The philosophy is simple: rather than making short-term decisions based on daily headlines, focus on how businesses and economies grow over years and decades.
Decades of data highlight the benefits of staying invested. For instance, the S&P 500 only experienced annual losses in 13 years between 1974 and 2024. The index generated positive returns for more than 20 years, even through events like the Great Depression, the 2008 financial crisis, or the pandemic crash.
From 1928 to 2023, the S&P 500 returned a geometric average of 9.8% annually, while Treasury bills only returned 3.3%, Treasury notes returned 4.86%, and gold averaged 6.55% returns. In other words, stocks have been the best-performing asset class for long-term investors.
The nature of stock markets is volatile. It is standard for share prices to drop 10-20% in short bursts. Long-term investors accept these swings as temporary. They hold through downturns and eventually capture the gains of rebounds and expansions.
Taking 90 years of returns, very few experienced losses in an investment in the S&P 500 after a hold of 20 years.
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One of the biggest obstacles to long-term success is investor behavior. Most individuals panic and sell during a downturn, just to get back in the market after most of the recovery has happened.
Dalbar's Quantitative Analysis of Investor Behavior shows that the S&P 500 had an average annualized return of 9.65% over the 30 years ending in 2022.
However, the average equity investor earned an average return of only 6.81%. Buying high during a rally and selling low because of fear consistently drags return below the market average.
Dividends are an important part of building wealth. Companies with steady earnings sometimes return money to the shareholders in the form of quarterly dividends. If you reinvest your dividends, you purchase more shares, which pay dividends. This process compounds over time, allowing your dividend stock to grow in value.
Over long periods, dividends that are reinvested can make up a large portion of stock market returns. Defensive, dividend-paying stocks in sectors such as consumer staples or utilities also have the potential to offer protection during downturns in the market.
Tax efficiency is another advantage of long-term investing. In the US, gains on assets sold within a year are considered short-term and taxed as ordinary income, with rates as high as 37%.
Conversely, if you hold the asset for longer than one year, any gains are classified as long-term capital gains, which may be taxed at only 0%, 15% or 20%, depending on your income. This difference can be a meaningful boost to net returns for investors willing to wait.
Frequent trading increases brokerage fees, commissions, and other daily transaction costs. While many online brokers today offer trades with zero commissions, there are still hidden costs associated with an active trader's behavior, such as bid-ask spreads and opportunity costs.
A buy-and-hold investor, on the other hand, simply avoids needless trading, thus saving fees. Over time, you will compound the savings plus your investment income. A buy-and-hold investor minimizes costs simply by avoiding unnecessary trading. Over time, these savings will compound alongside investment returns.
When selecting stocks for the long term, three categories stand out:
Index funds/ETFs: Low-cost funds tracking benchmarks provide diversification and stable growth.
Dividend-paying stocks: Companies with a history of regular payouts offer steady cash flow and compounding benefits.
Growth stocks: High-growth companies can deliver outsized returns, though they carry greater volatility and risk.
The right balance depends on an investor’s age, risk tolerance, and financial goals. Younger investors may lean toward growth, while retirees often prefer dividend or defensive holdings.
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Holding stocks for the long term is about more than waiting: it is about discipline, compounding, minimizing costs, and avoiding emotional steps. Short-term traders bet on timing the market, whereas long-term investors can wait out fluctuations and compound wealth. Stocks have outperformed all other asset classes over decades, and it is a proven fact: patience pays.
1. What qualifies as a long-term stock investment?
Holding a stock for more than 12 months qualifies as a long-term investment under U.S. tax law.
2. Why do long-term investments outperform short-term trades?
They allow investors to ride out volatility, benefit from compounding, and avoid costly timing mistakes.
3. Are dividends important in long-term investing?
Yes, reinvested dividends compound over time, often making up a large share of stock market returns.
4. What is the tax benefit of holding stocks long-term?
Long-term capital gains are taxed at 0-20%, while short-term gains can be taxed as high as 37%.
5. Which types of stocks are best for long-term investors?
Index funds, dividend-paying stocks, and select growth stocks, depending on risk tolerance and goals.