Aug
16
Why You Should Invest For The Long Term
Filed Under Entrepreneurship, Money | 42 Comments
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In How To Pick A Good Stock, we talked about how to find a good company to invest in. Now, let’s talk about when would be a good time to sell your stock. The short answer would be practically never. There are many advantages to holding on to the stock for a long time.
First, it took you such a long time to understand the company and what they do. You’ve spent countless hours pouring over hundreds of stocks on the stock market, picking the business that you think creates the most value. Why would you be so eager to get rid of it? Where would you put the money then? From Grow Your Pile Of Money, we know that money sitting around is deflating. You’d put it in this company to begin with because you’d thought that this was the best place for it. Has it suddenly changed because the company signed a huge contract, or lost a client?
Second, if you sell now, you would have to pay taxes on your earnings, especially if it’s short term. The long term capital gains tax currently is 15% and the short term tax is the same as your income tax (so probably 28-35%). Say you invested $100,000 and the stock went up 20% this year. If you just kept it in the company, then you would have $120,000 to invest in the same company for the year. However, if you decided to switch to a different company, then you would pay 35% tax on $20,000 of gains, which is $7,000. Now, you only have $113,000 to invest for the next year. Obviously, if you put a little compounding in, that $7,000 is a lot of money in say 30 years (See Why You Should Start Saving Today).
This means that in order for you to swich from company A to company B in this case, company B needs to perform about 6% better this year just to give you the same performance as company A. If you had truly taken your time when you picked company A, how could company B be so much better? By switching back and forth, you’re wasting tons of money on taxes. That extra money will really add up if you’re doing this every year, and if you take compounding into account.
Third, to see why day trading and swing trading does not work well, we should look at it as a business and see what kind of value it is offering. The answer is, really not much. You have no extra information than anyone else, so all you’re really doing is providing a little bit of liquidity to the stock exchange. For that service, you get paid nothing. Not only that, you pay the market makers (the guys who provide you liquidity) in the form of a bid/ask spread. You also pay the brokerage firms because they are providing you the service of easily buying the stock. Where would the money you “make” come from? Sounds to me like it’s people just like you. Since there’s no value created though, it’s just a bunch of people passing more and more money back and forth, until someone decides not to do it anymore. isn’t that kind of just like putting all your money on black in a roulette game?
Lastly, if you’re invested for the long term, you have the peace of mind of not having to constantly worry about your stock, which may actually be the most important gain. When you’re constantly looking up different stocks, day trading, etc., it uses up a lot of time. This is time you could’ve spent on other pursuits, such as making more money 
Especially in the beginning, where 10% isn’t all that much money, you’re much better off spending your time actively trying to get more money. Spending 100 hours to get a 20% on $1000, is much worse than spending an hour and getting a 10% return on your $1000. Those 99 hours translates to a lot of extra money!
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