There are a number of factors that can influence your decision to buy stocks and when you decide to sell them. Your average stock holding period can depend on your overall strategy. If you favor a buy-and-hold approach, then you may purchase stocks with the intent to keep them in your portfolio for decades until you reach retirement. On the other hand, you might buy and sell stocks the same day if you prefer active trading. Regardless of which way you lean, it’s important to understand how holding periods can affect investment outcomes.
A financial advisor could help you put a financial plan together for your investing needs and goals.
What Is a Stock Holding Period?
In investing, a holding period refers to the time between the purchase of an asset or investment and its sale. Holding periods matter because they determine whether an investor pays the short-term or long-term capital gains tax rate when they sell an investment for a profit.
Generally, stock holding periods begin the day after the stock shares are purchased. So if you buy stocks on August 31, the clock for the holding period starts ticking on September 1. When you choose to sell those stocks can determine how any gains are taxed.
The short-term capital gains tax rate applies to assets held for less than one year. Short-term capital gains are taxed at your ordinary income tax rate, which could get expensive if you’re in a higher tax bracket. Long-term capital gains tax applies to assets held longer than one year. The long-term capital gains tax rate ranges from 0% to 20%, depending on your income and filing status.
What Is the Average Stock Holding Period?
In terms of how long stocks stick around in a portfolio, the average investor holds shares for 5.5 months. This is according to an analysis of New York Stock Exchange (NYSE) data conducted by Reuters. The analysis also revealed that the average stock holding period has been trending shorter and shorter. In the 1950s, for instance, a typical investor held onto their shares for eight years on average.
So why are stock holding periods getting shorter? One explanation is the rise of automated and electronic investing. Digital trading platforms make it easy for investors to buy and sell stocks at virtually any time, from anywhere. Many online brokerages now charge $0 commission fees for stock trades, which is an added incentive for investors to buy and sell more quickly.
In the pre-internet, pre-online trading era, investors had to call their brokers to place trades or fax in their instructions. The process was effective – but also slow and often tedious. Now, an investor can buy a stock in the morning, then sell in the afternoon if they believe they can turn a quick profit or if they simply second-guess the purchase. They don’t have to call a broker; instead, they can schedule trades from their laptop or smartphone.
Increased volatility may also play a part in determining how long investors hold onto stock shares. When investing biases direct market behavior, that can lead to much shorter holding periods. Herd mentality and loss aversion, for example, are two biases that can cause investors to sell prematurely if they’re worried about increasing volatility generating big losses.
How Long Should You Hold Stocks?
When asking how long to hold stocks you’re really asking when is the best time to sell. Ideally, investors are following the old adage to “buy low, sell high.” This strategy ensures that you’re realizing capital gains for your efforts, rather than triggering a capital loss.
The issue is that timing the market is not an exact art. In fact, it’s something many investment professionals will advise you not to even try. Here’s why. When attempting to time the market, you have to be right twice and know when to buy and when to sell. That can be difficult even for the most experienced investor and getting the timing wrong could be costly.
So how long should you hold onto stocks? Is the average stock holding period of 5.5 months too long or too short? When deciding how long to hold stocks, it helps to consider the following:
- Investment goals and style
- Risk tolerance and asset allocation
- Capital gains
There are different reasons to buy stock. For some investors, the goal may to turn a quick profit by buying low, then selling high. Other investors may be interested in buying stocks that are likely to increase in value over time or yield dividend income for retirement.
When deciding how long to hold stocks, think about whether you tend to be more active or passive with investing. If you’re already more of a hands-on investor, then you may be more comfortable using technical analysis to evaluate stock trends and make short-term trades to maximize profits. On the other hand, if you prefer to be more hands-off then choosing value stocks or dividend stocks may better suit your style.
Also, consider how much risk you’re comfortable taking with stock trading. Again, trying to get the timing right when buying and selling stocks can be a gamble. If you’d rather dial back on risk then buying and holding could make more sense than day trading, which can mean more exposure to market volatility.
Finally, keep the tax implications in mind. If you follow the average stock holding period of 5.5 months you’ll be subject to the short-term capital gains tax rate if you sell those investments for a profit. You could offset some of the tax impacts by harvesting short-term losses. But choosing a longer holding period of one year or more could help to reduce your capital gains tax footprint over your lifetime.
Knowing the average stock holding period can give you some perspective on what’s happening with the market in general. It can also help you to decide on an appropriate length of time to hold stocks, based on your goals and risk tolerance. Overall, the best length of time to hold a stock is the one that yields the best return for your money while creating the lowest tax liability.
Tips for Investing
- Consider talking to a financial advisor about how to choose the right holding period for stocks and other investments in your portfolio. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re just getting started with stock trading, take time to research your brokerage account options. Specifically, consider what type of investments a brokerage offers and how much you’ll pay in commissions per trade. You may also be interested in whether a brokerage offers pre-market or after-hours stock trading, which would allow you to execute trades outside the regular market trading window.
- Know the rules for tax-loss harvesting if you plan to use this strategy to minimize capital gains tax. The IRS allows you to offset capital gains using capital losses. These offsets must be like-for-like, i.e., short-term gains for short-term losses and long-term gains for long-term losses. If your losses exceed your gains you can use some of them to offset up to $3,000 in ordinary income for the year and carry the rest forward into future tax years.
Photo credit: ©iStock.com/AndreyPopov, ©iStock.com/gorodenkoff, ©iStock.com/oatawa