One of the most common questions investors ask is, how long should I hold a stock? Similar to the question about when to buy a stock, it's equally important to consider how long to hold stock.
There isn't a definitive answer. The answer depends on your investment style and objective. While one person might be comfortable holding a stock for the long term, another investor might prefer short-term trades.
To sell or not to sell a stock
For example, an investor or trader might be interested in holding the stock until it returns 10 percent or 20 percent or until the stock reaches a particular threshold level. A change in a person’s circumstances could shift the investment strategy. A person approaching retirement age, for example, might like to shift to conservative holdings like bonds or cash. Also, an investor might want to rebalance the portfolio to conform to a certain allocation strategy, which might result in selling a particular stock.
Tax implications of holding a stock
Holding a stock for the short term is usually considered speculation rather than investing. Another consideration for investors when deciding for how long to hold their stocks has to do with tax implications. If a stock is sold at a profit, it attracts a capital gains tax rate. The rate varies depending on whether the stock was held for a year or more. If the stock was held for less than a year, the capital gains are taxed at the person’s marginal income tax rate. Usually, the tax rates are lower on capital gains on a stock that's held for more than a year.
Factors to consider before selling a stock
However, there are certain factors that investors should consider before selling their stocks.
You shouldn't consider a stock’s recent market performance before selling it. This is known as "timing the market," which generally isn't a profitable strategy for investors. The short-term fluctuation in a stock doesn’t necessarily impact its long-term prospects. In fact, selling during short-term dips in a stock price could be one of the most unprofitable strategies. For example, if an investor would have sold his investments during the global financial crisis, it would have been a lot of losses to rake in.
In fact, if you are confident about the long-term prospects of the business, which is based on strong financials, good management team, and a decent industry backdrop, you could add to your stock holding when the price drops.
How long to hold stock, according to legendary investors
There are several benefits of holding the stocks for the long term. First, it reduces the risk of short-term volatility. Usually, the best rewards from stocks can be reaped if the buy-and-hold strategy is followed. Many legendary investors, including Warren Buffett, suggest that investors hold a stock for the long term. Buffett said that “our favorite stock holding period is forever.”
Peter Lynch has talked about tenbaggers that rose multifold in value as he hung onto a few quality stocks for a long time period. He invested in Subaru stock even after it went up twentyfold. Lynch still liked the stock’s future potential and thought that it was still cheap after the surge. He ended up making sevenfold on the stock.
While every investor might not have the patience and financial wherewithal to hold a stock forever, it might be a good investment strategy to hold it for the long term.