Long-term investing requires considerable patience and conviction, particularly through the peaks and troughs of the market. Nonetheless, many experts, let alone household names like Warren Buffett have built their wealth and created vast fortunes by investing for the long-term.If you're unsure about investing versus trading, read our guide here. 

With the market tending to climb higher over time, a longer investment horizon provides more opportunity for stocks to grow into their valuations, and it smooths out the effects of macroeconomic headwinds or black swan events. Furthermore, as interest rates rise, it is often prudent for investors to think about growing their wealth over the long term in a sustainable fashion. 

On that note, let take a look at some of the benefits of a buy-and-hold investment strategy.

Leverage Time Instead of Timing

One of the things that has been proven time and time again is that investors often struggle to time the market, especially when selling stocks. In fact, this is why many pros advocate that it is more important to spend time in the market, rather than trying to time the market.

At times there may be a number of cognitive biases that ultimately get in the way of investors making rational decisions. Therefore, a longer investment horizon reduces the amount of decisions to be made, and removes some of the emotion that might otherwise accompany rash decisions, including a tendency to buy or sell shares based on poor judgements.For example, rather than managing the risks of a market downturn, some investors tend to panic and sell their shares once much of the sell-off has already taken place. They may then hesitate to re-enter the market on the way back up, compounding their decision.Meanwhile, overtrading is a factor that can weigh on overall returns. The hot-hand' fallacy, where we tend to feel our lucky streak will continue, is a sign of overconfidence that can prompt excessive trading as opposed to a simple buy-and-hold strategy.

Future Growth Exposure

Compared with other asset classes like bonds, and even housing for that matter, stocks are considered a volatile investment. Even large-cap stocks may be susceptible to a large fall of 25% in value over a short period of time, particularly during a market downturn.  

While it may be tempting to take decisive action and sell during that moment, it also means locking in your losses, which may only make sense if you have capital gains to offset, or a better investment idea. If you sell at an inopportune time, you could miss out on not just any rebound that ensues, but also long-term returns based on the company future growth. 

These ups and downs also provide an opportunity for some investors to dollar cost average.

Read here for more information on dollar cost averaging.

The Market Performs Well Over the Long-Term

The stock market has a solid history in terms of performance when compared against other asset classes over the long-term. 

For example, take the S&P 500. The benchmark US index has delivered an average return of 11.8% per annum over 90 years leading up to the end of 2021. That is significantly ahead of returns for US property and fixed-income, even though these asset classes may have outperformed stocks in certain individual years.

In the same context, small-cap and medium-cap stocks have the potential to deliver above-average returns across time, however, be aware they are generally more volatile and prone to bigger falls when stocks are sold off.

Capital Gains Tax Discount

While tax considerations on their own shouldn't necessarily prompt an investor to continue holding a stock that might otherwise be overvalued, there is a distinct tax benefit for investors who hold shares more than 12 months from the time of purchase.

Under the capital gains tax (CGT) discount, you can reduce your capital gain by 50% when selling or disposing of an asset if you owned the asset for at least 12 months, and you are an Australian resident for tax purposes.

In other instances, holding off from selling a stock will defer any potential capital gains tax from being incurred during that financial year. With the ability to carry losses into future financial years, there is some flexibility in managing your tax affairs if you hold stocks for the long term.

There are a number of provisions and exclusions governing the CGT discount rule, so make sure you speak to a licensed tax professional for guidance on your personal circumstances.

Compounding Dividend Growth

If you are investing in shares paying sustainable dividends, you may be aware by now that the power of compounding growth is a beautiful thing.

By reinvesting dividends back into a stock, you are effectively allowing your returns to compound in the same way that you might if you were to put your money in a bank account paying compound interest.

Basically, every time you participate in a dividend reinvestment plan, you are adding more shares to your holding. In turn, this entitles you to more dividends the next time the company declares a dividend. This will snowball over time, increasing the potential to maximise your wealth over time.

Less Fees Eat Into Your Returns 

The more frequently you buy and sell your shares, the more you pay in brokerage fees that eat into your returns. 

While Selfwealth members benefit from flat-fee trading, investors who use other investment platforms may end up paying commission that increases based on the size of your holding. Over time, active trading will mean higher fees, and unless you have an impeccable knack for getting every trade right, this could weigh on your overall returns and potentially impact your long-term investment goals.

What Type of Stocks are Long-Term Investments?

What may constitute a long-term investment differs from one investor to the next, and it is important to always review your investment thesis to make sure that it still stacks up. 

For example, are the reasons you originally invested in a particular stock still valid? Is the company outlook still promising? Are there alternative investment opportunities that might be considered a more efficient use of your funds? What tax implications might you face if you sell your holdings?

Regardless,  ETFs are one of the most popular long-term investments in the Selfwealth community.If you are new to exchange-traded funds, read our beginner guide here.

In short, ETFs that track particular sectors, or indexes, allow you to follow the market, which typically rises over time, let alone once you factor in distributions and dividends.

You can invest in ETFs for the same flat-fee as you would pay to buy an individual stock, but with the benefit of investing in a diverse basket of companies for only a small management fee.

Dividend-paying stocks and growth stocks might also be considered long-term investments, however, their risk profiles are at the opposite ends of the spectrum, and they may not be appropriate for everyone.

At the end of the day, the buy-and-hold strategy frequently outperforms trying to time the market, and it also alleviates some of the cognitive bias and emotion that might otherwise get in the way of building your wealth.