Re: Question for investors, traders...and investment types (and for Michael Ross too!)

One reason you might favour long-term investing over trading is the tax treatment of the two, an area often overlooked by investors.

As I'm unfamiliar with US Tax, I will illustrate with an Australian example. No doubt this will need to modified for US investors.

Let's suppose you're going to invest $10,000. You're going to use this for retirement, so we're looking at a long investment horizon of 45 years.

Let's say you have two options -- one is to invest for 45 years, and one is to trade in and out of the position every year.

Let's suppose also that the investment earns 10% per year before tax, whether you invest long term or trade (after costs). We'll relax this assumption later.

Your tax rate is 43% (highest marginal tax rate in Australia).

Now, if you're a long-term investor, you get taxed when you sell the shares, and in Australia you get taxed on HALF the capital gain at your marginal tax rate.

If you're a trader, you get taxed each year at your marginal tax rate.

So how does this effect you in the long-run?

Well, if you trade every year, and pay your tax every year, in the 45th year your $10,000 would grow to $121,164 after taxes.

If you invest-long term and pay your capital gains tax at the end, your after tax investment is $522,323, a huge $401,158 more than if you had traded each year!

If you're a trader, no doubt you're thinking that your trading would give you higher returns than the long-term investor.

Even if you managed to boost your returns from 10% to 15% by active trading, whereas the long-term investor only received 10%, the long-term investor would still be better off to the tune of $121,140.

Naturally this is an extreme example, as many of the forum participants might not be looking towards a 45 year investment horizon, but I think it is useful to illustrate the point of the benefits of looking at the tax treatment of your investments.

Cheers :)

- Thomas.

> Additionally, why hold onto a losing
> position? That's what the founder of the
> company does--there's no reason you have to
> act like owners. Why not just take a small
> loss and then re-enter if the stock turns
> around and starts moving up? (All it'll cost
> you is one commission or whatever.) While
> holding onto a losing position means your
> money is tied up and not doing you any good.