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Why Long Term Investing Beats Short Term Trading

Do you still believe in long term investing? The last economic recession caused many investors to change from long term investors to short term traders. Over the last 10 years the total return of the stock market index has been nothing. Market experts used this data to bemoan the death of buy and hold investing. Although the lost decade has hurt the retirement accounts of many investors, there are still reasons to remain a long term investor.

Here are a few reasons why long term investing beats short term trading.

Investors get the benefit of dividend income.

Long term investors get the benefit of dividend income. Dividend income has been known to contribute 3 to 4% to the annual return of an investment. Historically stocks that pay a dividend have been known to outperform stocks that do not. Traders miss the opportunity of gaining dividend income.

It’s nearly impossible to time the market.   

Every investor loves to believe that they can buy a stock at its bottom and sell it quickly at its high. This is much harder to do than it sounds. It is almost impossible for an ordinary investor to time the market. The truth is that most investors find that a stock dips after the buy it. The patient investor is the one who reaps the rewards because he can wait for a stock to reach a price where an acceptable profit can be made.

Investors get the benefit of lower taxes.

Any investment that you hold for at least 365 days is taxed at the maximum capital gains tax rate of 15%. This is much lower than the ordinary tax rate for most Americans. The government gives the benefit to encourage capital investment. When traders sell an investment it is taxed at their ordinary income tax rate. This could mean paying 31 to 36% for an investment. The federal government loves trading income because it adds revenue to the Internal Revenue Service’s coffers.

Traders have to devote more time to their investments.

Remember that there is a significant difference between investing and trading. Investors are in it for the long haul whereas traders exit in and out of positions. When you invest, you do not have to be concerned with the daily fluctuations of the market. Traders have to keep an eye on the market daily and be ready to act if a position goes against them. Needless to say, trading can be time consuming and stressful as well.

As you can see, investing may not have the glamour of daytrading but it beats the results of trading any day.

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