How Long Should You Hold Stocks? (Guide to Maximizing Investment Returns)
Whenever you buy stocks, you’ll often wonder how long you should hold them for. Days, months, years, or even decades?
You might’ve heard the saying “time in the market beats timing the market” and that is certainly the case. No one can predict the future, making for risky investing if you decide to hold your stocks for the short term.
Holding your stocks not long enough might cost you tremendous amounts in both taxes and missed opportunities.
In this post, we’ll help you to understand how long to hold your stocks for, the reasons behind doing so, and some common ways to sell your holdings.
Always Hold Stocks for Longer Than 1 Year
Stock prices are extremely volatile. They can increase and decrease second by second, making it tough to “time” the right time to sell.
By holding your positions for longer than one year, you can limit some of the short term volatility while still realizing some of your potential gains.
While the stock market will typically return around 7% annually to investors, it doesn’t mean that you should necessarily expect 7% year after year.
Instead, you should expect to see a 20% increase in one year, followed by a potential decrease the next year, eventually averaging out to 7% annually.
For this reason, it’s wise to hold your stocks for at least 365 days.
Why 1 Year?
In addition to decreasing short term volatility, you’ll also see significant tax advantages by holding your investments longer than one year.
After one year, your investments will be taxed at the long term capital gains rate (maximum of 20%), which is significantly less than the short term capital gains rate (maximum of 37%).
Let’s see how this might work out. For single filers, if you paid $10,000 for your stocks and your total annual income is $85,000 annually, and you decide to sell within one year for the amount of $12,500, your tax bill would amount to $550 in federal taxes paid.
If you hold the same position for longer than one year with the same annual income, you would pay $500 in federal taxes. This might not seem like much, but that’s a 10% increase paid to Uncle Sam cutting into your profits.
Let’s look at the same situation for those in a higher tax bracket. Assuming your annual income is over $518,401, your short term capital gains tax rate would be 37%. If you sold your investments within the year (with the same $2,500 gain above), your federal taxes paid would amount to $1,095!
By holding your stocks for more than one year, your federal taxes paid would amount to $720! That’s more than a 34% decrease in taxes paid just by waiting for more than one year!
Hold Stocks for 5+ Years to Maximize Returns
If your goal is to maximize returns, holding your stocks for longer than 5 years will do just that.
Because the stock market increases in value exponentially, you’ll begin to see returns on your investments at a more rapid rate after the first few years.
By taking advantage of compound interest, you’ll be capable of achieving monumental long term gains.
Let’s look at an example of compound interest over 5 years assuming a 7% return on investment each year.
If you initially invest $5,000, after 5 years, your portfolio will be valued at $7,012.76.
If you did not have any compound interest and assumed a standard 7% interest rate, your portfolio would be valued at $6,750.
You’ll notice a difference of $262.76. You can think of this money as interest on your interest. While this amount may seem minimal, this was only a $5,000 initial investment over 5 years. Increase the amount of your investment or the length you decide to invest and you can watch your gains increase exponentially.
Holding Stocks Until Profitable
Another strategy that some investors will use is to hold their position until it becomes profitable, no matter how long it may take.
Because you do not realize a gain or loss until you sell your positions, you will not technically “lose” or “make” any money until the sale.
This means you could potentially wait years, if not decades, until finally deciding to sell your holdings. However, this could come with some risk.
Some companies are better positioned for the future than others. By holding stocks that are not reputable or prove to be adjusting for the future, you could end up “losing” all of your money.
When it Make Sense to Hold Stocks for Less Than 1 Year
While holding your positions for longer than one year is an obvious choice, there are some scenarios in which you might want to go ahead and cash in on your investments.
Rapid Increase in Value
If your investments increased in value rapidly and you are not trustworthy of them in the long term, it might be okay to sell them within the year.
What is a rapid increase in value? If your positions increase in value more than 100% within a year, that could easily be considered drastic. Some might consider an increase of 50% enough to trigger a sale. This is all based on your goals and investment strategy.
You’ll need to consider the taxes on your sale to understand how much you will profit.
Loss of Job or Income
If you suddenly lose a job or have a drastic decrease in income, you might want to consider selling your investments to keep your mortgage paid.
While this is certainly not ideal, you might be forced into it if you do not have an emergency fund established.
Medical bills, car repairs, or other financial emergencies can make it acceptable to sell your stocks.
The Company Becomes Corrupt
If you find that one of your stocks is in a company that has become corrupt, it might be time to sell. If they are participating in illegal accounting practices or have been misleading their customers, this might mean it’s time to get out.
These events tend to have extremely negative consequences on the price of the stock.
The Company Consistently Underperforms
If the stock you’ve invested in consistently underperforms, it might be time to ditch it for another investment. While 1 year is probably not enough time to gauge its long term performance, consistently underperforming is often a sign of poor management that leads to long term problems.
How to Sell Stocks the Right Way
When you’ve made the decision to sell your stocks, there various methods to go about selling them.
Target Price Selling
If you wish to sell your positions only when they reach a certain price, you can use target price selling. This is a rule-based sale, meaning certain conditions must be met in order for the transaction to occur.
You’ll select a position and the number of shares you wish to sell prior to setting your sell price.
If the price is reached, the transaction will occur and your stocks will be sold under the conditions you selected.
This can be a great way to maximize your returns as you can input a price larger than your purchase price.
Opportunity Cost Selling
Some investors will choose to liquidate some of their positions in exchange for another investment. This is known as opportunity cost selling.
Perhaps you examine an investment that is priced significantly lower than your current holdings. You could sell some of your current positions in order to purchase this new investment that could generate larger returns in the future.
This selling strategy is used for investors with little cash, or those looking to make better decisions with their money.
Deteriorating Fundamentals Selling
Another rule-based selling method is deteriorating fundamentals selling. With this method, your stocks will be sold if certain financial metrics are consistently not met.
For example, you might choose to sell a stock if its balance sheet continues to decrease and cash flow takes a hit. This method of selling is a way to rid your portfolio of underperforming assets based on their financial statements.
Conclusion: Holding Stocks to Maximize Returns
Depending on your investing strategy, it’s usually best to hold your stocks for longer than one year to limit taxes paid to Uncle Sam but there are a few scenarios when it might make sense to sell prior.
By holding your stocks for longer than 365 days, you are capable of reaping the benefits that come with compound interest while simultaneously limiting the effects of short term volatility.
Attempting to time the market makes for a risky investment strategy, therefore we recommend holding your stocks for as long as possible to achieve the largest gains.
How long do you typically hold your investments? Comment below!