Day trading often involves speculating rather than truly investing. There are few day traders who are successful, however – it’s estimated that only about 10% of day traders are successful. Most people who are able to achieve investing success do so by focusing on the long term. Overall, investors who focus on the long-term are consistently more successful. Those who trade at the first sign of trouble tend to perform worse than those who stick with stocks through thick and thin.
Avoid Timing The Market
Millions of people have tried to time the market. However, it’s nearly impossible to do. No one knows when the absolute market bottom will hit during a down cycle. Likewise, no one knows ahead of time when the market will hit a peak. For example, let’s say there was a hypothetical person who invested $1,000 into the S&P 500 on January 1, 2010. By leaving the money alone through the end of 2019, this investor would have nearly $2,900 after a decade of investing.
An investor who attempted to time the market and missed out on the top 10 days of market returns would see their stash drop to $1,945. Missing just the top 40 days of the decade would drop this value to $923, less than the $1,000 initially invested. While the markets offer no guarantees, this example can help demonstrate how beneficial a long-term investing strategy can be.
Take Advantage Of Compounding
Another great benefit of long-term investing is the ability to take advantage of compounding. Many of the larger blue-chip companies in the stock market make money in most years.Those that have a solid record of increasing their net income levels will frequently pay dividends. Those taking a long view of investing will frequently reinvest these dividends, and this will increase the number of shares an investor will hold over time. More shares can lead to more dividends, which could lead to even more shares. As long as the share price holds or increases, this strategy essentially compounds your money.
Cut Taxes
A nest egg can be like a bar of soap. The more it gets handled, the more it tends to wear away. A large part of this is often due to the impact of taxes. Selling stocks for a profit can lead to capital gains. Those who sell stocks they’ve held for less than a year will be taxed at their marginal income tax rate, which can be as high as 37%. Those who sell long-term holdings can
pay anywhere between 0% and 20%. Therefore, it can be beneficial from a tax standpoint to hold stocks for the long term, when they support your overall portfolio objectives.
Investing involves risk, including possible loss of principal. No investing strategy ensures a profit or guarantees against losses. Absolute Retirement Solutions does not offer investment advice or services. We are a financial services firm offering retirement income strategies using insurance and annuity products.