Let’s look at one example of how taxes ding compound interest. Let’s say you buy some stocks. It’s been a good year, and stocks have gone up. You feel like a genius. Now you’re going to play around.
You decide to sell high and buy low. Momma didn’t raise no dummy! You bought the stock at $100 a share and now it’s at $130. Wow! 30% in one year! At this rate, you’ll be rich in no time!
One night you are watching the news. It’s bad, and it made the markets go down. Your stock is down to $118. Oh no! You’re going to lose your profit. So you sell, and decide to buy it back when it’s lower. By the time you get to your computer, it’s $116. As soon as you sell, you owe tax on the $16. Since you have held it less than a year, you owe (depends on your tax bracket and state, but let’s round it off) 35% of your gain, or let’s say $5 a share. (You may owe as much as 50%!)
So now you wait to buy the stock back lower. It goes down to $114 and hovers there for a week. Then you watch the news. It’s good. It drives the market up. Your stock went to $119. Dang! Now you panic. You think you did the wrong thing, and you want to own this stock because you think it is a good long-term stock to hold. You don’t know what to do. One day it goes down to $117 and you think, ok, great, it’s going down, I am a genius, and then it goes up to $120 and you kick yourself. Finally, you just buy it back at $119.
What happened here? First, you are human and concocted a flawed investment strategy that has been tried by millions before you. Second, you are emotional, and let it affect your thinking. Third, you wasted lots of time and worry where you could have been playing with your kids. You sold low and bought high. And, you just incurred $5 a share tax.
Sound familiar?
Ha..been there, done that!
that is one reason I like real estate… it compounds year after year and you don’t pay any tax at capital gains rate until you sell it.
If that was the case then you would be gambling and don’t belong in the markets.
Rule 1. Have rules
Rule 2. Plan your trade and trade your plan.
That would include entry and exit strategy to minimize loss and maximize gain.
Anything else and you might as well play the slots!!