Three choices exist for every investment decision – buy, sell, and do nothing. Probably the most overlooked part of each choice is taxes.
Taxes are decided by what you buy, what you paid for it, what you’re paid while you own it, when you sell it, and what you sell it for. Simply, income and realized gains get taxed. Gains are a direct result of buying and selling. Notice, there is no capital gains tax for doing nothing.
The government’s only gift to investors, and it’s a big one, is not taxing unrealized gains. Tom Russo learned this from Warren Buffett.
(You can also deduct realized losses, to a limit, but I don’t consider it a gift because I believe it drives people to trade more frequently in an effort to lower their taxes each year instead of focusing on what matters – getting the best after tax return over time.)
Buffett is the master at evading taxes. His net worth is the direct result of never realizing gains.
Buffett has bought and sold a lot of stock over his lifetime, with one exception – Berkshire Hathaway. His net worth, and after-tax return, has compounded at a much higher rate because he didn’t sell (or receive a dividend).
He’s not alone.
A lot of wealthy people got there by owning great companies over long periods of time; and not by jumping in and out of the market.
There’s certainly a lesson in that.
This time of year is typically when people sit down to do a financial review. Keep this in mind as you decide the fate of your investments.
- Revisiting Common Traits of Great Investors – Gurufocus
- Financial Advice for My New Son – M. Housel
- Don’t Be Blinded By Big, Scary Numbers – B. Ritholtz
- Rethinking Commodities – Morningstar
- Investing versus Flipping – Research Affiliates
- Reflecting On The First 100 Investments – Haywire
- Don’t let the Nobel Prize Fool You. Economics is Not a Science – Guardian
- Ray Kurzweil’s Wildest Prediction: Nanobots Will Plug Our Brains Into the Web by the 2030s – Singularity Hub