Taxes should never be a consideration. The more money you make the more you pay taxes. In America taxes is only a fraction of profit. I will be happy to pay more and more taxes resulting from more and more profit.
That's an easy fallacy to fall into. If we look at the situation rationally, we will discover that taxes do need to be considered. If your gains are large enough, they can overcome the taxes but in many cases, it is better to avoid "skimming" a little profit.
To illustrate, let's assume a stock is appreciating 50% a year. Gallant buys $10,000 and holds. Goofus buys $10,000 and in six months decides it has topped and sells hoping to buy back for less. To illustrate the consequences of taxes, lets assume Goofus buys back at the same price he sold at and there are no commissions and that this pattern repeats for the next 5 or 10 years.
Gallant will have deferred paying any taxes on his investment activities until he finally decides to sell.
Goofus will have capital gains taxes due at the end of each year that he sold and repurchased the stock even though he made no actual gains on the trading activity. So Goofus will need to sell some of his shares each year to pay these taxes while Gallants entire investment will continue compounding at 50% per year.
If Goofus is such a skilled trader and can read the tops and bottoms with accuracy, it is possible to come out ahead but this example clearly shows that the tax consequences must be considered.
For those who still disagree since "Goofus wouldn't have any taxable gains if he sold at the same price he purchased" remember, the stock is appreciating each year, the gains come from that appreciation.
I can assure you, the differences over 5 or 10 years of these two scenarios is astounding.
To compound these problems, we have a higher tax-rate for short term gains. And a good idea can quickly turn disastrous if even one sell is timed improperly. I am sure there are many on this board who have sold at a price with the intent of buying back for less, only to see the share price soar away, never to return. The compounded loss of this type of mistake is enormous.
Please consider the hidden consequences of trying to gain wealth this way. The lowest risk/highest reward path to fantastic wealth is letting your gains in excellent companies compound year after year.
Bux
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