Course 505: Long-Term Investing's Tax Advantage
The Toll Taxes Can Take
 In this course 1 Introduction 2 The Toll Taxes Can Take 3 Can Good Trades Offset Taxes? 4 Long-Term Investing's Advantages

Consider two investors, McEnroe and Borg, who each have \$100,000 in a taxable account. McEnroe uses his \$100,000 to buy several stocks. But he's skittish. He shuffles his portfolio every year. Let's say his stocks rise 10% annually, and at the end of each year, he sells his holdings and re-invests the proceeds in other stocks. Because of McEnroe's short investment horizon, he pays 28% capital-gains taxes on his winnings each year. McEnroe's after-tax return is: Pre-tax return x (100% - tax rate) 10% x  (100% - 28%) = 0.1 x  (1.00 - 0.28) = 0.072
0.072 = 7.2%  When he retires in 20 years, McEnroe will have accumulated: \$100,000 x  (1 + 0.072) 20 = \$401,694 Borg, on the other hand, is a patient, buy-and-hold investor. He invests his \$100,000 in a few solid companies and never touches his portfolio for 20 years. Let's assume he also generates a 10% annual return (the same as McEnroe) and sells everything at the end of 20 years. Because Borg holds his stocks for longer than 12 months, he qualifies for the lower tax rate applied to long-term capital gains--20%. Borg ends up with: \$100,000 x  (1 + 0.10) 20 x  (1 - 0.20)= \$538,200 McEnroe's response? "You've got to be kidding!"
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