Build Wealth By Long Term Investing In Stocks
Disclaimer : Anything mentioned in this post is not financial advice and is for informational purposes only. All investments carry risk and there is no guarantee of profit nor protection against loss. WealthGap does not provide any legal, tax, or accounting advice. At the time of writing this article, the author owns shares of AMZN, FB, and MSFT. WealthGap is not recommending buying or shorting any of the securities above.
Long Term Performance Of Common Stock
As of today, the S&P 500 index is up ~250% with dividends reinvested in the past 10 years. If you invested $100,000 10 years ago you would have ~$350,000 today. In the same period, Gold (in USD) has increased by ~43% and if you invested $100,000 you would have ~$143,000 today. Next time someone tells you to buy gold, think twice about following their advice. At WealthGap, we replicate some of the most prestigious hedge funds' portfolios for our clients and charge a much lower fee. These hedge funds aim to outperform the market and now our clients can capitalize on the brightest minds on Wall Street and invest like billionaires.
What Billionaires Have In Common
When we look at America's richest billionaires list, we see the names Jeff Bezos, Bill Gates, Warren Buffett, and Mark Zuckerberg...etc. What do these multi-billionaires all have in common? Each has a large ownership of a company that has a strong moat and each of their companies has become more and more profitable over the decades. The only exception in this short list is Warren Buffett. Although Warren Buffett never invented a groundbreaking product or service, he is smart in that he bought stocks of fundamentally strong companies. Buffett built his wealth through owning small pieces of other people's businesses. This proves even if you are not an entrepreneur, you can still become super rich by picking the right stocks to invest. If you are not an investment professional, WealthGap can help you pick the stocks for you.
Why Long Term Investing > Short Term Investing
"I wish I haven't sold my ____ stocks a couple months ago!" I am sure you have heard that before. Most people tend to sell their stocks when they see a profit. However, time is the best friend of a wonderful business. Over time, a wonderful business will become more and more profitable, which means its share price will rise higher and higher. Selling stocks of a fundamentally strong company just because you want to lock in a profit is foolish. Selling stocks when stock prices fall is even more foolish. In a long term investment period of 2+ years, short term volatility (up and down movement of stocks) is meaningless.
When you sell stocks you incur transaction costs, which include trading commissions (mostly gone in 2020), bid ask spread difference (negligible cost), and taxes (major cost). There are two different tax rates that can be applied when you make a profit selling stocks: long term capital gains tax rate and short term capital gains tax rate (I am not a tax professional and this is not tax advice). The long term capital gains tax rate is lower than the short term capital gains tax rate. When you hold a stock for longer than a year, the long term capital gains tax rate is applied to your profits when you sell the stock. This is an incentive for investors to invest for the long term.
Imagine if you push a snowball down the peak of a snow mountain. It rolls down and becomes bigger and bigger. The longer it rolls the bigger it gets and the rate at which it grows increases. Imagine the stock you bought is a snowball. When you decide to sell the stock after a short period of time, you would incur taxes when you make a profit. When you pay taxes it is like slicing a piece of the snowball away to the IRS. Then the snowball keeps rolling but the snowball size would not increase as fast as when you never sliced a piece of it away in the first place. This is why long term investing would yield higher returns over short term investing in the long run.
Buy And Hold Forever?
Maybe. In theory, you should buy and hold a stock for years if it is a wonderful company. However, industry changes can occur and can significantly damage a company's profitability. When I was little, there was a company called Kodak that sold film cameras and was dominant in the photographic film industry. Back then, Kodak was an extremely profitable business and was probably a good investment. As you can imagine, no one uses Kodak anymore in this age. Digital cameras replaced film cameras and destroyed Kodak's profits. Decades later, smart phones have destroyed digital cameras too. Thus, when a company's fundamentals or its industry trends have changed for the worse, you should no longer continue to hold its stocks and should invest in other wonderful companies. Painful as it may, it would be time to slice the snowball.