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Crypto mining and staking are two different ways for a blockchain network to achieve consensus and validate transactions. They use different means to achieve a similar end. While mining uses a consensus mechanism called proof-of-work (PoW), staking uses another consensus mechanism called proof-of-stake (PoS). Crypto mining and staking can also generate rewards for network users or participants, which is why many people are interested in them.

Introduction to Crypto Mining and Staking

Crypto mining and crypto staking are two different protocols cryptocurrencies may use to validate transactions and reach consensus on network data. Staking involves locking up tokens for a fixed period, while mining requires running specialized hardware.

What Is Crypto Mining?

Crypto mining is a consensus protocol utilized by some blockchain networks. It’s grown into a multi-billion dollar industry, mostly because the mining process can lead to rewards in the form of new coins or cryptocurrency. In effect, mining involves computers solving complex mathematical problems or equations, validating data on the blockchain, and “unlocking” new blocks on the network. Users who participate may be “rewarded” for doing so, and receive cryptocurrency for their efforts.

What Is Crypto Staking?

Crypto staking is a consensus protocol utilized by PoS blockchain networks, serving as an alternative to mining. It involves users pledging or “locking up” their crypto holdings to a network, which may be used to validate data on the blockchain. Users can then earn staking rewards for doing so. In that way, it’s similar to putting money in a savings account and generating interest.

Why Do Both Methods Exist in Blockchain?

Both crypto mining and staking work to the same end: To entice users to participate and validate data on a given blockchain network. They’re simply two different ways to do it. There can be some advantages and disadvantages to both, of course, and those involved in the crypto space would do well to understand each.

How Crypto Mining Works

Crypto mining is a fairly complex process that doesn’t involve pickaxes or hard hats, but rather, computer processors.

The Proof-of-Work Mechanism Explained

As noted, a proof-of-work consensus mechanism on blockchain networks involves miners solving mathematical equations. Doing so validates transactions on the network, which helps ensure that the information stored on the blocks is accurate and secure. That all requires computational power and resources, which miners supply.

As the data on each block is validated, new blocks are opened up, which also unlocks new cryptocurrency. So, participants who “mine” are forking over their computational resources in hopes of earning some of that new, unearthed crypto.

Essential Mining Hardware and Software

Crypto mining involves using computer processing power, and that can take many forms. In short, though, miners can use CPUs, GPUs, or advanced “mining rigs” called ASICs to mine crypto. In many cases, mining hardware is designed specifically for solving cryptographic equations, and can cost thousands of dollars.

Block Validation, Rewards, and Incentives

Again participating on a blockchain network as a miner involves validating data in hopes of earning a reward. That’s the main incentive for miners. Each blockchain network is different, and on some networks, such as Bitcoin, there are hundreds of thousands of miners at work, meaning that competition for mining rewards is fierce.

Energy Consumption and Environmental Concerns

One concern that’s become front-and-center as it relates to crypto mining is how resource intensive it tends to be. Dedicating computer hardware to solving cryptographic equations requires electricity to run and cool the machines, and in aggregate, can eat up a lot of energy.

That’s drawn the ire of some individuals and groups, who may feel the energy may be better used elsewhere, and who have voiced concerns about how that energy is being generated, and the impacts on the environment.

Popular Cryptocurrencies You Can Mine

There are numerous mineable cryptocurrencies on the market. Bitcoin is the most popular (and the most competitive), but it certainly isn’t the only one.

And as a quick reminder, proof-of-work coins offer miners newly minted tokens as a reward for helping to solve the computational problems involved in processing a block of transactions — though there isn’t necessarily a guarantee that participants will be rewarded for leveraging their computational resources as a part of that process.

Some popular PoW cryptocurrencies include:

•   Bitcoin (BTC)

•   Bitcoin Cash (BCH)

•   Litecoin (LTC)

•   Ethereum Classic (ETC)

•   Dogecoin (DOGE)

Note, too, that different PoW coins can use different mining algorithms. While Bitcoin uses SHA-256, Litecoin and Dogecoin use Scrypt, for example. Moreover, to mine a specific coin, the hardware (be it ASICs or GPUs) must be compatible with the type of algorithm used to mine that coin.

How Crypto Staking Works

Crypto staking has a very different approach to blockchain transaction validation compared to mining. In effect, it involves users pledging their crypto holdings to a blockchain network, basically as collateral, which helps validate the data on that network (similar to mining). Participants may then earn passive rewards, usually expressed as a percentage yield of the coins staked.

The Proof-of-Stake Mechanism Explained

On a proof-of-stake network, participants are referred to as “validators” (or stakers).” Validators “stake” their holdings on the network, and those resources are used by the network to validate and secure the data on the blockchain. It can be a complex, granular, and intricate process when you get down to it, but as mentioned, the aims are the same as mining: Validate data, and generate rewards for participants.

How Staking Pools, Validators, and Exchanges Operate

Participants may combine their holdings for staking purposes to try and increase their odds of being rewarded. This is called a staking pool, and represents the combined efforts of several validators. A single point-person or entity may run these pools, called a pool operator, who can then divvy up any rewards proportionally, too. Pool operators may also charge a fee for their services.

Conversely, becoming an independent staking validator often requires a large sum of tokens, along with keeping a computer up and running constantly. Validators can receive a penalty for not having 24/7 uptime, and starting your own validator node can come with a hefty price tag.

It’s also possible to stake coins through a crypto exchange. This is one of the easiest ways to stake, but these can also involve higher fees or commissions that reduce the amount of the rewards received.

Staking and Reward Distribution

A PoS cryptocurrency generally benefits from having more coins staked to its network. Having a higher staking ratio makes it harder for attackers to gain control of the cryptocurrency, and it can also help promote price stability, since fewer coins may be bought and sold.

But the critical thing to know about crypto staking is that, in general, the more crypto holdings you stake, the higher your chances of being selected to validate transactions and earn a reward.

Depending on the blockchain network, too, there may be different rules as to whether a participant’s pledged holdings can be “unlocked” or “unstaked” at a given time. So, you’ll want to do some research if you’re uncomfortable with the idea of not being able to liquidate your crypto for a period of time, if it’s staked.

Accessibility and Technical Requirements for Staking

A big advantage to staking versus mining is that staking doesn’t really require any equipment or resources, other than some current crypto holdings with which to stake. So, if you don’t have any interest in buying a mining rig or seeing your energy bill increase, staking can be an alternative. And for those with only a smaller amount of crypto to stake, the ability to join a staking pool can also be enticing.

Popular Cryptocurrencies for Staking

There are an increasing number of cryptos on the market that use the proof-of-stake protocol. Ethereum is the biggest and most popular, and Ethereum itself actually switched from a proof-of-work network to a proof-of-stake one in 2022.

Again, stakers can lock up their native PoS blockchain tokens on the platform in exchange for a potential reward. Some popular PoS cryptocurrencies include:

•   Ethereum (ETH)

•   Solana (SOL)

•   Cronos (CRO)

•   Avalanche (AVAX)

•   Polkadot (DOT)

Staking vs Mining: Key Differences and Similarities

There are both similarities and differences between crypto staking and mining.

Comparing Consensus Mechanisms (PoW vs PoS)

As covered, both mining and staking have the same goal, which is to validate and secure blockchain networks. They both incentivize participants to pledge their resources to the network with the prospect of potentially earning rewards. Again, though, the difference comes down to how each consensus mechanism works on a more fundamental level.

In a nutshell: Proof-of-work networks use computational power to solve cryptographic puzzles or equations, validating the data. Proof-of-stake networks ask users to stake their holdings, use those resources to validate the network’s data, and reward some of those stakers.

Hardware, Software, and Resource Requirements

A huge difference between the two consensus protocols is the resources required for participants to actually get involved. Mining requires mining equipment, or, in other words, computational power and resources. Miners need computers, and the energy required to run them.

Stakers don’t; they simply need crypto holdings they’re willing to stake.

Reward Systems and Potential Profitability

The potential profit or rewards of crypto staking versus mining depends on a few things.

Staking could be more profitable for the average user because the only thing required is money. Mining requires specialized hardware, access to cheap electricity, and some technical knowledge.

The value of the coin in question is also important. Users could mine a lot of coins or have a lot of coins staked, but if the coin’s value falls against their local fiat currency, they could still realize losses.

Then there are the barriers to entry. It bears repeating: Many proof-of-stake exchanges or networks allow users to stake tokens in order to earn a relatively small yield. Mining, on the other hand, requires buying the necessary hardware and learning how to use it.

Security Considerations for Each Approach

Proof-of-work networks are frequently noted as being more secure than their counterparts. That’s because they’re relying on decentralized computational power from a number of participants; that makes them more difficult to attack, and the blockchains themselves a bit more secure.

Proof-of-stake network participants, on the other hand, are financially incentivized to maintain the security of the network since bad actors could lose the coins (and money) they have stored in the network.

Plus, as cryptocurrencies become more established, they’re continuing to build security features into the networks.

Accessibility, Scalability, and Barriers to Entry

Proof-of-work networks can be less accessible, given that they require participants to have expensive mining rigs for computational power they’re willing to dedicate to the blockchain. So, in that sense, mining may be less accessible to the average individual, given that there can be up-front costs involved.

Staking, conversely, is comparatively easy to do — you simply need to have some crypto holdings to stake, which can be purchased from an exchange in order to get started. However, the high cost of the more established PoS coins can make them inaccessible to the average staker.

Environmental Impact: Mining vs Staking

As touched on, the crypto space can require substantial resources, which can have an environmental impact. If that’s important to you, specifically, staking may be the way to go.

Mining rigs suck up a lot of electricity, and electricity is generated one way or another (it may be via burning coal, or generated by a wind turbine, for example). That generation may cause pollution^[1], and the electricity itself may be used for other things besides mining — which some people may prefer.

As such, staking is seen as a much more environmentally friendly alternative.

Pros and Cons of Crypto Mining and Staking

Both mining and staking have their advantages and disadvantages. Here’s a rundown.

Advantages of Mining

When compared to staking, crypto mining shines in a few key ways. Perhaps most prominently, miners may have the potential to earn higher rewards compared to staking, though the upfront costs of the mining rigs need to be considered in terms of profitability.

Additionally, proof-of-work networks could be more secure in certain cases. In addition, users aren’t required to lock up their holdings as collateral, and miners themselves actually own their equipment, which they may use for other purposes as well.

Disadvantages of Mining

On the other hand, the main drawbacks to crypto mining are that there can be a high barrier to entry for individual miners, given the prohibitive cost of mining equipment. Also, for more established PoW coins, it’s virtually impossible for individuals to compete against the large warehouse mining operations that are now more prevalent, and there is also the environmental impact to consider.

Advantages of Staking

Staking has a clear advantage over mining in that it’s typically much cheaper and easier to do, potentially serving a passive form of crypto income. There’s no equipment required, and it’s a more environmentally-friendly alternative for generating crypto rewards.

In all, staking is a lower-cost alternative in terms of financial costs for participants, and potential costs to society in terms of resource usage.

Disadvantages of Staking

The high costs of established cryptocurrencies, such as Ethereum, can pose a high barrier to entry for those who wish to stake independently. Staking rewards also tend to be lower overall compared to mining, though they may be steadier, with lower operational costs.

Aside from that, some believe that PoS networks could potentially be less secure compared to proof-of-work protocols, given the computational power the latter uses to secure the network. Users also need to lock up their holdings when staking, which means they can’t use them for other purposes, and they could lose value during that time.

Choosing Between Staking and Mining: Key Factors to Evaluate

Making a decision about crypto staking vs. mining comes down to a few important things.

Common Scenarios and User Profiles

Those interested in participating in the mining or staking process might want to ask themselves questions like:

•   How much time and money do I want to devote?

•   What is my level of technical expertise with crypto and computers?

•   Which cryptocurrencies am I interested in, and which network do I want to support?

•   Do I want to become my own miner/validator, or have someone else do the heavy lifting?

Those with technical knowledge who want to handle things themselves could consider mining an appealing option. Or, those looking to invest less time and money might simply choose to stake some tokens on an exchange. The potential profit you can fetch from staking vs. mining varies according to a number of factors, including how much an individual is willing to invest upfront, as well as the market price of the token involved.

Assessing Technical Skills and Experience Level

Another thing to consider is how technologically savvy you are when it comes to the crypto space. A mining rig may require some expertise or a certain level of skill to set up and get running; staking, on the other hand, may be as simple as flipping a switch on a crypto app. With that in mind, staking can be much easier for beginners, or those without a wealth of technical knowledge.

Financial Commitment and Operational Costs

Worth mentioning again: Mining requires some financial commitments and ongoing costs in the form of equipment and resource usage. That is, you need to buy stuff to do it, and pay for the energy required to keep your equipment running.

If that sounds like a lot, staking may be the more attractive option, given that equipment and resource requirements are vastly different.

Environmental and Regulatory Considerations

As discussed, mining is much more resource-intensive. If you have concerns about the environmental impact of the crypto space, you might consider staking over mining.

There may also be some differences in how the two methods are viewed by regulators. A lot of things are still being sorted out across the federal agencies involved in regulatory authority, such as the Securities and Exchange Commission (SEC), Department of the Treasury, Federal Reserve, IRS, and others, so that may be something to keep an eye on going forward.^[2]

Balancing Risks, Rewards, and Practicality

Taken all together, each individual will need to assess what is practical and reasonable if they’re hoping to generate crypto rewards. There are risks to be aware of when considering any type of cryptocurrency, and each person is going to have different resources available to them, skill sets, risk profiles, personal preferences, and more.

The Takeaway

Crypto mining and crypto staking are both methods utilized by blockchain networks to validate and secure data. They incentivize users to pledge their resources to the network by offering the prospect of a potential reward, but each method is different in some key ways.

To sum it up: Mining is generally more expensive and resource-intensive given the computing power that’s required, but may offer the prospect of bigger rewards. Staking can be a cheaper and easier-to-access alternative, but the rewards may be lower (if more steady). It’s important to always assess the risks involved, too, before deciding whether to stake or mine crypto.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

FAQ

Can I switch from mining to staking if I already own cryptocurrency?

Whether you can stake or mine crypto depends wholly on the specific crypto, and which mechanism its respective blockchain network uses to validate and secure itself. So, no, you can’t necessarily switch from one to the other.

Do staking and mining affect the value of the cryptocurrencies involved?

It’s possible that staking or mining could affect the value of crypto over time, as some cryptos have a capped quantity. As more coins or tokens hit the market, it could impact value.

Is it possible to mine or stake all cryptocurrencies?

Cryptocurrencies can either be staked or mined, not both. Though some cryptos may switch consensus mechanisms, as Ethereum did in 2022.

How does the environmental impact of staking compare to mining?

Staking is much more environmentally friendly than mining, as it doesn’t require as much computational power, and thus uses far less resources (energy) to process.

Are there tax implications for mining and staking rewards?

Yes, if you earn rewards as a result of mining or staking, you may generate a tax liability. The IRS considers those rewards to be ordinary income, so you’ll be taxed for those at your ordinary income rate. Conversely, gains you realize from selling, exchanging, or converting crypto are subject to capital gains taxes.

About the author

Brian Nibley

Brian Nibley is a freelance writer, author, and investor who has been covering the cryptocurrency space since 2017. His work has appeared in publications such as MSN Money, Blockworks, Business Insider, Cointelegraph, Finance Magnates, and Newsweek. Read full bio.

Photo credit: iStock/nortonrsx

SOCRYP-Q325-106

Investing for the long term is a time-honored way to help manage certain market risks so you can reach financial goals, like saving for a downpayment on a house and retirement.

When it comes to building a nest egg for bigger life expenses, saving alone may not get you where you need to go. If this is the case, the boost of potential investment returns over time may help you reach your savings goal. That’s where long-term investing, also called buy-and-hold, comes in.

That said, long-term investing isn’t a risk-free endeavor, and there are also tax implications for holding investments long term. Knowing the ins and outs can make all the difference to your portfolio over time.

10 Tips for Long-Term Investing

An advantage of a long-term investing strategy is that “time in the market beats timing the market,” as the saying goes. In other words, by sticking to an investment plan for the long term, your portfolio is more likely to weather its ups and downs, and fluctuations in different securities.

So how do you go about establishing a long-term investment plan? These tips should help.

1. Set Goals and a Time Horizon

Your financial goals will largely determine whether or not long-term investing is the right choice for you. Spend time outlining what you want to achieve and how much money you’ll need to achieve it, whether that’s paying for your child’s college tuition, retirement, or another big goal.

Once you’ve done that, you can think about your time horizon — when you’ll need the cash — which can help you determine what types of investments are suited to your goals.

For example, stock market investing can be appropriate for big goals in the distant future, such as saving for a child’s education or your own retirement, which could be 20 or 30 or more years down the line. This relatively long time horizon not only gives your investments a chance to grow, but it means that you also have the time to ride out market downturns that may occur along the way. That may translate to a more favorable return on investment, although there are no guarantees.

2. Determine Your Risk Tolerance

Your risk tolerance is essentially a measure of your ability to stomach volatile markets. It can help you determine the mix of investments that you may choose for your portfolio. But your risk tolerance also depends on (or interacts with) your goals and time horizon.

Longer time horizons may allow you to take on more risk in some cases, because you’re not focused on quick gains. Which in turn means you might be more inclined to hold a greater proportion of stocks inside your portfolio, for example.

How long should you hold stocks? Generally speaking, holding stocks longer could be beneficial from a tax perspective, and from a risk perspective. Theoretically, the longer you stay invested, the longer you have to recover should markets take a dive.

Setting your risk tolerance also means knowing yourself. If you’re somebody who won’t be able to sleep at night when the market takes a downward turn, even if your goal is still 20 years away, then you may not want a portfolio that’s aggressively allocated to stocks. While there are no safe investments per se, it’s possible to have a more conservative allocation.

On the other hand, if short-term market volatility doesn’t bother you, a more aggressive allocation may be an option to help you achieve your long-term goals.

3. Set an Appropriate Asset Allocation

Understanding your goals, time horizon, and risk tolerance can help give you an an idea of the mix of assets, such as stocks, bonds, and cash equivalents you may want to hold in your portfolio.

As a general rule of thumb, the longer your time horizon, the more stocks you may want to hold. That’s because stocks tend to be drivers of long-term growth — although they also come with higher levels of risk.

As you approach your goal, you may want to consider shifting some of your assets into fixed-income investments like bonds. The reason for this shift? As you get closer to the time when you’ll need your money, you’ll be more vulnerable to market downturns, and you may not want to risk losing any of your cash.

For example, if the market experiences a big drop, you may be left without enough money to meet your goal. By gradually shifting your money to bonds, cash, or cash equivalents like CDs or a money market account, you can help protect it from potential stock market swings. That way, by the time you need your cash, you may have a more stable source of income to draw upon.

4. Diversifying Your Investment Portfolio

A key factor of investing is portfolio diversification. The idea is that holding many different types of assets helps reduce risk inside your portfolio in the long and short term. Imagine briefly that your portfolio consists of stock from only one company.

If that stock drops, your whole portfolio drops. However, if your portfolio contains stocks from 100 different companies, if one company does poorly, the effect on the rest of your portfolio will be relatively small.

A diverse portfolio generally contains many different asset classes, such as stocks, bonds, and cash equivalents, as mentioned above. And within those asset classes a diverse portfolio holds many different types of assets across size, geographies, and sectors, for example.

Different types of stocks

The basic principle behind diversification is that assets in a diverse portfolio are not perfectly correlated. In other words, they react differently to different market conditions.

Domestic stocks for example, might react differently than European stocks should U.S. markets start to struggle. Or investing in energy stocks will be different from tech-stock investing. So, if oil prices drop, energy sector stocks might take a hit, while tech might be less affected.

Many investors may choose to add diversification to their portfolios by using mutual funds, index funds, and exchange-traded funds ETFs, which themselves hold diverse baskets of assets.

5. Starting Investing Early

Increasing your time horizon gives you the opportunity to invest for longer. Take stocks, for example. Though risky, stocks typically offer higher earning potential than other types of investments, such as bonds. Consider that the average stock market return annually is about 10% (or 7% when adjusted for inflation).

Second, the sooner you start investing, the sooner you are able to take advantage of compound growth, one of the most potentially powerful tools in your investing toolkit. The idea here is that as your money grows, and you reinvest your returns, you steadily keep increasing the amount of money on which you earn returns.

As a result, your returns may keep getting bigger and your investments could start to grow exponentially.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

6. Leaving Emotions Out of It

Humans are emotional creatures and sometimes those emotions can get the better of us, leading us to make decisions that aren’t always in our best interest. Letting emotions dictate our investing behavior can result in costly mistakes, as behavioral finance studies have shown.

For example, if you’re investing during a recession and the stock market starts to drop, you may panic and be tempted to sell your stocks. However, doing so can actually lock in your losses and means that you miss a potential subsequent rally.

On the other end of the spectrum, when the stock market is roaring, you may be tempted to jump on the bandwagon and overbuy stocks. Yet, doing so opens you up to the risk that you are jumping on a bubble that may soon burst.

There are a number of strategies that can help these mistakes be avoided. First, fight the urge to constantly check how your investments are doing. There are natural cycles of ups and downs that can happen even on a daily basis. To help reduce potential anxiety, you might want to avoid constant checking in and instead keep your eye on the big picture of achieving your long-term goals.

Tinkering with your asset allocation based on emotions and spur-of-the-moment decisions can throw off your allocation and make it difficult to achieve your goals.

7. Reducing Fees and Taxes

Taxes and fees can take a hefty bite out of your potential earnings over time. Many investment fees are expressed as a small percentage (e.g. less than 1% of the money you have invested) that may seem negligible, but it’s not.

Also, many investment costs can be hard to track. Meanwhile, various expenses can add up over time, reducing any overall gains.

Expense ratios

To cover the cost of management, mutual funds and exchange-traded funds charge an expense ratio — a percentage of the total assets invested in the fund each year. An actively managed mutual fund might charge 0.75% or more. A passively managed ETF or index fund may charge an average of 0.12%. So you may want to choose mutual funds with the lowest expense ratios, or you may consider passive ETFs or index funds that charge very low fees.

The expense ratio is deducted directly from your returns. You may also encounter annual fees, custodian fees, and other expenses.

Advisory fees

You can also be charged fees for buying and selling assets as well as commissions that are paid to brokers and/or financial advisors for their services. It’s important to manage these costs as well. One of the best lines of defense is doing your research to understand what fees you will be charged and what your alternatives are.

8. Taking Advantage of Tax-Advantaged Accounts

There are a few long-term goals that the government generally encourages you to save for, including higher education and retirement. As a result, the government offers special tax-advantaged accounts to help you achieve these goals.

Saving for Education

A 529 savings plan can help you save for your child’s college or grad school tuition. Contributions can be made to these accounts with after-tax dollars. This money can be invested inside the account where it grows tax-free. You can then make tax-free withdrawals to cover your child’s qualified education expenses.

Saving for Retirement

Your employer may offer you a 401(k) retirement account through your job. These accounts allow you to contribute pre-tax dollars, which lower your taxable income and can grow tax-deferred inside the account. If your employer offers matching funds, you could try to contribute enough to receive the maximum match. When you withdraw money from your 401(k) at age 59 ½ or later, it is subject to income tax.

You may also take advantage of traditional IRAs and Roth IRAs. Traditional IRAs use pre-tax dollars and allow tax-deferred growth inside your account. You pay tax on withdrawals in retirement.

Roth IRAs are funded with after-tax dollars, so money in your account grows tax-free, and withdrawals are not subject to income tax.

There are other tax-advantaged accounts that can work favorably for long-term investors, including SEP IRAs for self-employed people, and health savings accounts (or HSAs), in addition to other options.

9. Making Saving Automatic

You can continually add to your investments by making saving a regular activity. One easy way to do this is through automation. If you have a workplace retirement account, you can usually automate contributions through your employer.

If you’re saving in a brokerage account you can set it up so that a fixed amount of money is transferred to your brokerage account each month and invested according to your predetermined allocation.

Automation can take the burden off of you to remember to invest. And with the money automatically flowing from your bank account to your investments accounts, you probably won’t be as tempted to spend it on other things.

10. Checking In on Your Investments

You may want to periodically check in on your portfolio to make sure your asset allocation is still on track. If it’s not, it may be time to rebalance your portfolio.

This could occur, for example, if the stock market does really well over a given period, upping the portion of your portfolio taken up by stocks.

If this is the case, you might consider selling some stocks and purchasing bonds to bring your portfolio back in line with your goals. Periodic check-ins can also provide opportunities to examine fees and other costs (like taxes) and their impact on your portfolio.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

What Is Long-Term Investing?

Long-term investing is a strategy of investing for years. A long-term investment is an asset that’s expected to generate income or appreciate in value over a longer time period, typically five years or more. Long-term investments often gain value slowly, weathering short- to medium-term fluctuations in the market, and (ideally) coming out ahead over time.

Short-term investments are those that can be converted to cash in a few weeks or months, but they’re generally held for less than five years. Some investors trade these assets in short periods, like days, weeks, or months, to profit from short-term price movements.

However, a short-term investing strategy can be highly risky and volatile, resulting in losses in a short period.

Long-term Investments and Taxes

It’s also worth noting that for tax purposes, the IRS considers long-term investments to be investments held for more than a year. This is another important consideration when developing a longer-term strategy.

Investments sold after more than a year are subject to the long-term capital gains rate, which is equal to 0%, 15%, or 20%, depending on an investor’s income and the type of investment. The long-term capital gains rate is typically much lower than their income tax rate, which can help incentivize investors to hang on to their investments over the long run.

Why Is Long-Term Investing Important?

Long-term investing can be beneficial for the three reasons noted above:

•  Holding investments long-term may allow certain securities to weather market fluctuations and, ideally, still see some gains over time. While there are no guarantees, and being a long-term investor doesn’t mean you’re immune to all risks, this strategy may help your portfolio recover from periods of volatility and continue to gain value.

•  In the case of bigger financial goals, such as saving for retirement or for college tuition, embracing a long-term investment plan may help your savings to grow and better enable you to reach those larger goals.

•  Last, there may be tax benefits to holding onto your investments for a longer period of time.

Investing With SoFi

The most important tips for long-term investing involve setting financial goals, understanding your time horizon and risk tolerance,diversifying your holdings, minimizing taxes and fees, starting early so your portfolio can benefit from compounding, and understanding how tax-advantaged accounts can be part of a long-term plan.

These strategies can help you build an investment plan to match your financial situation.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

What is a realistic long-term investment return?

A realistic long-term investment return will ultimately depend on the investments you choose, how long you hold them, as well as the fees and taxes you pay. To give some perspective, the average historical return of the U.S. stock market is about 10% (or 7% with inflation taken into account), but that’s an average over about a century. Different years had higher or lower returns.

Where is the safest place to invest long-term?

All investments come with some degree of risk. One lower-risk way to invest for the long-term might be with fixed-income securities like bonds, which pay a set return over a period of time. Money market accounts and certificates of deposit (CDs) generally also have fixed rates. But remember, there is always some risk involved. Also, generally, the lower the risk, the lower the return.

What is the biggest threat to long-term investments?

Long-term investments, like all investments, are vulnerable to market changes. Even when investing for the long haul, it’s possible to lose money. Another threat is the risk of inflation. As inflation rises, your money doesn’t go as far. So even if you save and invest for decades, if inflation is also rising at the same time, your money may have less purchasing power than you expected.

Photo credit: iStock/Pekic