Day traders may hold stocks for a few hours, while buy-and-hold investors may hold onto a stock for decades. There is no single formula that works for everyone when it comes to deciding how long to hold stocks.
Rather, the decision to hold stocks or sell them must include a number of factors that may be unique to each investor. These can include everything from company fundamentals to industry trends to the investor’s own goals.
In a perfect world, an investor would hold onto stocks until they made a profit. But how much of a gain, and how long that might take — and what to do if the stock loses value? — is more complicated than it seems. Here are some variables to consider.
Why Hold Onto Stocks for the Long Term?
Here are some reasons for an investor to hold on to a stock: They only feel compelled to sell it because of that stock’s most recent performance in the markets. But selling a stock because of a sudden drop in value could be considered timing the market — a strategy that, at times, can hurt investors.
What happens today in the markets doesn’t necessarily reflect longer trends, therefore holding onto stocks despite a dip may give your shares time to recover.
A study done by Dalbar illustrates how investors who attempt to time the market often turn into their own worst enemies. During the 20-year period studied, the S&P 500 had an average annual return of approximately 10%. During the same time period, the average investor achieved a return of just 2.5%, due to the frequent changing of their investment holdings (often mutual funds).
Sure, in the moment, it can be tempting to sell a stock based on a dramatic price change. But, calculating stock profit or loss alone may not be particularly helpful. Stocks that enjoy long-term growth take on some dips in price. And, similarly, dud stocks may have some brief moments in the sun.
Buying and Holding for the Long Game
What’s the ideal holding period for a stock? Some investors might say forever. (Or, at least until the money is needed — like, for income when you’ve reached your target retirement date.)
There are several allures of holding stocks for a long time. First, spending ample time in the market reduces the risk of short-term market volatility. Ups and downs in value are an inevitable part of investing in the stock market, whether through a single stock or a fund. Especially in the short-term, the market could move in any direction.
The bear market between 2007 and 2009 was a prime example of this, as the U.S. stock market lost more than 50% of its value then. This wasn’t an ideal time to be holding stocks — but it was an even worse time to sell. With a buy-and-hold strategy, investors can keep their eyes fixed on the potential for a recovery. The stock market hasn’t yet experienced a dip that it did not bounce back from.
What Is Index Investing?
This is why some investors prefer passive investing strategies. Index funds hold a representative sample of the entire stock market, in an attempt to achieve the market’s average returns. Instead of betting on just one company stock’s performance, index funds invest in the entire engine of the economy. Research has shown that over time, market returns may exceed the returns of active strategies.
Since the great recession of 2008, the stock market has more than made back its losses. This is why buy-and-hold is a strategy that is popular with index fund investors.
Holding Stocks for Future Profitability
Let’s say that a company’s stock has performed well. Perhaps, it’s even hit an investor’s profitability target. Is growth, alone, a good reason to sell? Some investors might think no.
At any moment in time, what makes an investment worth holding on to is the belief that it will be profitable in the future. Therefore, what has happened in the recent past may or may not be relevant to the future.
In investing parlance, this notion is called fundamental analysis. Here are just a few big factors that an investor might chew on when adopting this type of market analysis:
An investor wants to hold on to the stock of a company that continues to increase its sales over time, with a forward-looking forecast that indicates growth. Perhaps the company continues to beat Wall Street’s expectations on earnings.
Maybe, the company has strong management that continues to improve profit margins without sacrificing innovation. Or, perhaps the company continues to develop products that increasingly capture market share, making the company a stronger industry competitor.
While none of the above scenarios outright guarantee a company’s stock will continue to perform well into the future, keeping an eye trained to the days ahead — instead of the past — may be a useful skill for investors to develop.
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Reasons to Sell Stocks
Some investors and traders, however, are not interested in long-term holding strategies. Instead, they set certain profit thresholds, selling once those requirements are met.
Selling Once a Stock Hits a Profit Requirement
Here’s one scenario:
A trader may want to sell once a stock reaches 10% or 20% in profit. Similarly, a stock could be sold once it hits a preselected price target — usually based on a stock’s per-share price. Price-target selling can be set up automatically, through what’s called a limit order.
For example, an investor buys a stock for $50. They want to sell this stock if (and only if) the price reaches $65. A limit order can be set to sell when the stock hits this target price. If it never reaches $65, then order is not filled (and the stock remains held).
Selling for Personal Reasons
Although it is not, generally, recommended that an investment strategy change in response to the market’s ups and downs, there are plenty of personal reasons why a person may opt to sell stock investments.
Certain life events may create a shift in an investor’s ability to tolerate the risk of stocks. For instance, a divorce, family death, the birth of a child, or a big move may cause a person to want to keep more of their overall investment portfolio in easy-to-access cash (or other less volatile investments).
Similarly, a person might just want to build up their cash savings. For financial goals with a more immediate timeline, it may make little sense to subject that money to the volatility of the stock market. Instead, savers may prefer to sell stocks to keep that money liquid and ready to be used.
Changes in personal investment strategy can also drive an individual to sell stocks. Shifts along these lines may have nothing to do with a stock’s recent performance or that of the market. Investors approaching retirement, for example, could want to shift towards more conservative investments, like cash or bond holdings.
Selling to Diversify Assets
Many investors opt to put a mix of stocks, bonds, and cash in their long-term investment portfolios. For example, an investor may choose a mix of 70% stocks and 30% bonds to balance out investment goals and risk tolerance.
But, when diversifying assets, one type of investment may outperform the other. Because of the potential for this uneven growth, an investor’s asset allocation could get thrown out of balance.
Let’s imagine a large spurt of growth in the stock market coupled with more lackluster growth in the bond market. Remember the investor from above, with a 70/30 mix? Maybe, now. they’re left with a portfolio that’s closer to 80% stocks and 20% bonds.
That mix may carry more risk than the investor deems appropriate. So, in this scenario, rebalancing the portfolio requires selling some stock holdings and then moving the funds into less volatile bonds.
Understanding Short-Term Holdings
Investors debating how long to hold their stocks will likely want to consider taxes. There’s no minimum amount of time when an investor needs to hold on to stock.
But, investments that are sold at a gain are taxed at a capital gains tax rate. This rate changes, depending on whether the investor held onto the stock for more or less than one year.
For a holding period of less than one year, any gains will be taxed at a person’s marginal income tax rate. By holding onto a stock for more than one year, an investor will likely lower their tax burden. It can be helpful for investors to speak with a certified tax professional before adopting any tax strategy.
The Takeaway
Even though investors typically put a great deal of thought into selecting stocks and other securities, with the hope that those securities will appreciate in value, there is no guarantee they will. And there is no crystal ball that can tell any investor how long to hold onto a stock.
Sometimes it’s the stock itself that determines how long you’ll hold it. But sometimes your investing strategy determines your stock selection. If you’re planning to sell quickly with a gain in mind, that’s one approach. But if you expect to hold onto a stock for the long haul, that can also influence which stocks you think have staying power.
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