What do you mean by a Ďlong-termí investment?

McClatchy-Tribune Information Services

March 13, 2017

PITTSBURGH ó The problem is "long-term" means different things to different people.

For some investors, a time horizon of one or two years could be considered long term. Another investor may consider long term to mean a holding period of 20 years or more. There are no rules set in stone on the definition because everyoneís situation is different.

"One of the first and most important things we do with any client is determine their time horizon. Thatís trickier than it sounds," said Aaron Leaman, chief financial officer at Signature Financial Planning in Pittsburgh. "If you are saving for college, the time horizon is 18 years.

"Some people think their time horizon is when they retire. But thatís when they need the money to start, not finish," he said. "Others think itís when they die. They donít want to outlive their money.

"But wealthier clients tend to think generationally. They want to leave money to their children and grandchildren. Their time horizon could be hundreds of years if you think in terms of leaving a legacy."

A long-term horizon could even be forever. In cases where a family or individual would like to endow a charitable organization, they might want that money to last and provide income forever.

"I have a client in her Ď80s who purchased shares of Apple stock for $3,000 in the 1980s," Leaman said. "Today those shares are worth $250,000. Some might say she is too heavily invested in the one stock, but the reality is she doesnít need the money. She plans to leave the stock to her children."

Leaving the stock to her children will give the money a new lease on life as far as the tax collector is concerned.

"If she were to sell the shares, her capital gains tax bill would be huge. But when the children inherit the stock, they wonít owe any capital gains taxes," he said.

"Sometimes your time horizon isnít your horizon. Sometimes itís your kidsí time horizon. Thatís how we have to think about time horizon. What is your goal for the money, and how long will that take?"


While there may be no singular definition of the term, it does appear that the long term may be getting shorter.

According to Boston-based Ned Davis Research, as of December 2015, the average holding period of a stock on the New York Stock Exchange was 8.3 months.

The average holding period for a stock during the 1950s and Ď60s was eight years.

With the advent of online trading accounts, investors can buy and sell stocks as easily as clicking a computer mouse. In the 1950s and Ď60s, stocks were still issued in the form of paper certificates and investors had to physically visit a stockbrokerís office to make a transaction ó often paying a hefty sales commission for whatever service they received.

The Internal Revenue Service makes a very clear distinction between a short-term and long-term investment as it relates to the taxation of realized gains.

An investment held for one year or less is considered a short-term investment. The realized gains from short-term investments ó if any ó are taxed as ordinary income.

An investment held for more than one year is a long-term investment. The realized gains on long-term investments are taxed at the lower capital gains tax rate of zero percent to a maximum of 20 percent for those in the highest tax bracket.

Financial adviser Curt Knotick, CEO of Accurate Solutions Group in suburban Pittsburgh, said the taxation of capital gains in taxable accounts encourages investors to hold stocks for longer periods of time.

"We need to be very careful when taking a shorter horizon when trading stocks and mutual funds in non-qualified accounts," Knotick said. "From a tax perspective, if there are gains in our investment, those assets held over one year are treated differently than assets held less than one year.

"Having a true long-term horizon for investing purposes benefits not only the growth opportunity, but may minimize taxation of those gains."


History has proven that the tried-and-true formula for long-term investing in the stock market is 20 years, according to Nick Besh, a senior vice president and investment director at PNC Bank in downtown Pittsburgh.

He said the stock market, over 20-year periods going back to the early 1900s, almost always produces a positive return for investors who buy quality stocks and then stay the course for two decades.

"If you invest in the stock market and you have 20 years to invest, you will make money," Besh said, adding that proper asset allocation can alleviate much of the worry as stock prices rise and fall over time. Asset allocation is a strategy that aims to balance risk and reward by dividing a portfolioís assets ó stocks, bonds, cash ó according to an investorís goals, risk tolerance and investment horizon.

He said there have only been two 10-year periods when stocks did not make money. One of those came during the Great Depression. The other was 2000-2010.

But wealth managers generally agree that the best way to have exposure to the stock market is to buy great companies and hold them through any market condition.

"The stock market had the worst start to a new year in history in 2016," Besh said. "Yet we finished the year with the S&P 500 up by 12 percent. If you didnít have a long-term perspective, you would have sold."

The short-term focus that many current investors have can be traced back to painful losses they suffered during the financial crisis of 2008. U.S. household wealth fell by $16.4 trillion of net worth from its peak in spring 2007, about six months before the start of the recession, to when things hit bottom in the first quarter of 2009, according to figures from the Federal Reserve.

"People lost confidence in the stock market," Besh said.

"The financial crisis of 2008 really shook their confidence in believing in a company or stock. Thereís a lot more trading rather than investing and holding a stock for long periods of time. People sell when they see a profit because they worry if itís sustainable."

After hitting its lowest point in March 2009, the S&P 500 rallied 208 percent by January 2017.

"With valuations as high as they are now, people are wary of holding stocks for a long time," Besh said. "If they get scared and liquidate, thatís not investing. Thatís timing the market.

"It comes back to asset allocation. You can only hold when you have an asset allocation you are comfortable with."