Investment in stocks for better returns

 

Stocks are considered to be long-term investments. This is, in part, because it's not unusual for stocks to drop 10% to 20% or more in value over a shorter period of time. Over a period of time, investors have the opportunity to ride out some of these highs and lows to generate a better long-term return.

If we look back at stock market returns since the 1920s, individuals have never lost money investing in the S&P 500 for a 20-year time period. Even considering many of the setbacks, such as the Great Depression, Black Monday, the tech bubble, and the financial crisis, investors would have experienced gains if they had invested in the S&P 500 and held it uninterrupted for 20 years. While past results do not guarantee future returns, it does suggest to the investors that a long-term invest in stocks generally yields positive results, if given enough time.

One of the inherent problems in investor behavior is the tendency to be emotional over their investment. Many of them claim to be long-term investors up until the stock market begins falling, which is when they tend to withdraw the money due to fear of additional losses.

Many of these same investors fail to invest in stocks and when a rebound occurs, they jump back in only when most of the gains have already been achieved. This type of "buy high, sell low" behavior tends to cripple investor returns drastically.

Investors who pay too much attention to the stock market tend due to which they handicap their chances of success by constantly trying to time the market too frequently. A simple long-term buy-and-hold strategy can have yielded far better results.

An investor who sells a security within one calendar year of buying it, gets any gains that are equivalent to an ordinary income. Depending on the reports by individual's adjustedgrossincome (AGI), this tax rate could go as high as 35%.

Market returns and customer expectations

The securities trades that have been held for longer than one year, generally see any gains taxed at a maximum rate of a merely 20%. Investors in lower tax brackets can even qualify for a 0% tax rate on long-term capital gains.

Also, one cannot ignore the fact that the value of a stock gets unlocked during unexpected times. A share price may go up or down because of some hype or rumor. But because of its inherent strength, eventually, the share price will eventually go up. The value of a share at which it gets unlocked is something no one can predict. The gain is because of the economic value that was unlocked because of the long-term performance of the company during a stipulated time. Money is generated as the company grows. Whereas in the short run, money in the stock market is getting rotated from one pocket to the other. In the long run, money gets generated which on the other hand is beneficial for the investor.

Also, the power of compounding works in your favor, only if you tend to develop your share market investment plan based on long-term.

Short-term fluctuations and long-term growth have kept on repeating in the stock market history again and again. So, based on this history, we can draw the following logical strategies.

In a span of 20 years, generally there are 14 good years and 6 bad years. The beauty or irony of the stock market is that, it is not possible even for the experts to forecast when the bad years will start or when the good years will end. Also it is likely impossible to predict in what order the bad years or good years will happen.

A best investment plan in stock market should not get affected by the changes in short term performance of the stocks.

So generally, it is considered better to invest for long term and let the short term market reactions to subside and respond to the fundamentals.