Should you buy and sell stocks often even if that would make higher return to your overall portfolio? There is an old saying on the Wall Street - “Buy low sell high”. Sounds very simple but let’s have a look if we are going to be better off in long term by trading a lot of stocks or take less active path.
Here is an example from book by Robert G.Hagstrom - The Warren Buffett Portfolio. Imagine you have $1 to invest and your investment would double every year. If you sell your investment at the end of the year you will have to pay capital gain tax and let’s assume you are on high tax bracket that would result in $0.34 tax and your net gain $0.66. Next year you are going to invest principal $1 + $0.66 net gain. If you will do it every year for next 20 years you would end up with a net gain of $25 200 after paying taxes of $13 000. The net gain might look interesting, especially when you started with $1, but let’s have a look what would happen if you kept the stock for 20 years and it’s value would double each year. I hope you are sitting at the moment as this might be a shocker. You would end up with $692 000 after paying around $356 000 in taxes. Of course above example is almost impossible to achieve on the market, however it illustrates the magic of compound interest.
You can run your own simulation on this website - Compound interest calculator