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

Note than Borg accumulated more money than McEnroe for two reasons. First is the lower capital-gains tax on long-term returns: 20% for Borg versus 28% for McEnroe. The second is the power of compounding. Even if both Borg and McEnroe were each taxed at 28%, Borg would still come out ahead: $484,380 versus $401,690. Why? Every time you split the pot with the government, you have less money left over on which to earn compound returns. And compounding--earning a return on past returns--makes Borg a richer man. Borg shares none of his winnings with the government for 20 years, so all of his winnings compound. McEnroe, in contrast, shares 28% of his winnings with the government each year, leaving him only 72% of his investment on which to earn compound returns. Over 20 years, that difference really adds up. Taxes aren't the only advantage of a buy-and-hold strategy. If you buy stocks with the intention of holding them for many years, chances are you will be much more careful about what you buy--and less prone to jump on the latest hot stock or sector. So even in a nontaxable (or tax-deferred) account like an IRA or a 401(k), a buy-and-hold approach makes sense. This strategy is especially smart if you're using a high-cost, full-service broker. By throwing taxes and commissions into the equation, a high-turnover strategy really puts an investor at a disadvantage.

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