A long term investment strategy typically involves holding investments for more than a single year. As Kavan Choksi Professional Investor says, such a strategy can include holding assets like stocks, mutual funds, bonds, exchange-traded funds (ETFs), and more. Long term investment strategy requires a good deal of discipline and patience, and investors must be ready to take on a certain amount of risk while they wait for higher rewards down the line.
Kavan Choksi Professional Investor underlines the benefits of holding stocks for the long term
Investing in stocks and holding them is among the best ways to grow wealth over the long term. It is not uncommon for sticks to drop 10% to 20% or more in value over a shorter period of time. However, when investing for the long term, one would have the opportunity to ride out such highs and lows and generate better returns over time. Even considering various setbacks like the Great Depression, Black Monday, the tech bubble, and the financial crisis, individuals have rarely lost money after investing in the S&P 500 for a 20-year time period. Even though past data does not provide a guarantee of future returns, it does underline that investing in stocks for the long term usually yields positive results.
Keeping the stocks in the portfolio for longer can also be more cost-effective than regular buying and selling stocks. After all, the longer one does hold their investments, the fewer fees they shall have to pay. Depending on the type of account a investor has and the investment firm handling their portfolio, one typically has to pay some kind of trading or transaction fees. For instance, one might be charged a commission where a certain amount is deducted when the investor buys and sells stocks through a broker. Such costs are charged to the account of the investor whenever they trade stocks. Therefore, their portfolio balance is likely to drop with every sale they make.
Long term investments can also help in saving on taxes. Any gains from stock sales should be reported to the IRS or Internal Revenue Service. Short term capital gains usually cost investors more than what they would have to pay after holding the stocks for a longer period of time.
As Kavan Choksi Professional Investor says, people investing in stocks for the long term also benefit from compounding with dividend stocks. Dividends represent profits that companies share with shareholders. They are typically provided with stocks with a strong performance history such as blue-chip or defensive stocks. Defensive stocks are those that perform consistently well regardless of economic conditions or market downturns. These companies distribute dividends regularly, often quarterly, to eligible shareholders, allowing investors to benefit from their success. While it might be tempting to cash out these dividends, it would be a smarter move to reinvest them back into the companies that issued them.
Compound interest refers to the interest calculated not only on the initial principal of the stock portfolio but also on any previously earned interest. This means that the interest (or dividends) earned by a stock portfolio can compound over time, leading to a gradual increase in the account balance of the investor in the long term.
