Wouldn’t It Be Nice to Take No Risk But Get 40% of the Reward?

Well, it must be. The only way I know to do that is to be the IRS.

Seriously. Taxes are a big “prob­lem” that changes the real-world equa­tion for buy­ing and sell­ing stocks.

Let’s say you start with a dol­lar. One dol­lar. And, through your invest­ing bril­liance, you turn that dol­lar into $100,000. Congratulations. Now, how­ev­er, you feel that your cur­rent invest­ment strat­e­gy and hold­ings don’t suit your pur­pos­es. Maybe you want to diver­si­fy? Or, maybe you want to become an angel investor and invest in small star­tups and restau­rants (why do doc­tors do this? Is this some­thing they teach in med­ical school?)?

Let’s say that you have the goal of dou­bling your port­fo­lio. You want your new strat­e­gy to take you from the cur­rent $100,000 to $200,000.

So you need an invest­ment that will dou­ble, right?

Wrong.

You need an invest­ment that will more than triple!

What do you mean Dave? I have $100,000, and if I want to get from there to $200,000, I need to dou­ble my invest­ment.

Only in the real world of math and num­bers.

In the world of tax­es, when you sell your cur­rent hold­ings you owe tax­es. Let’s assume an over­all tax rate of 40% (includ­ing state/local/federal, what­ev­er… it’s prob­a­bly more, but 40% illus­trates the point). Your $100,000 is made up of $99,999 in gains. That means you owe tax­es on those gains… at the 40% rate (and round­ing) that means that after tax­es you only have $60,000 to invest.

If you want to get to from $60,000 to $200,000 you need to more than triple your mon­ey.

I’ve been using large round num­bers just to make a point. The math is the same if we’re talk­ing about $10,000 in growth. The instant you real­ize any growth, even if it’s part of an adjust­ment to your port­fo­lio, you have to pay tax­es. You instant­ly reduce your port­fo­lio val­ue dra­mat­i­cal­ly.

Banks are telling us a “buy-and-hold” strat­e­gy does­n’t work any­more. When we lis­ten, we feed the IRS (seem­ing­ly more than we feed our­selves). We take all of the risk, the IRS gets almost half of the reward. Forget the fair­ness of it for a moment. You need a strat­e­gy that helps your mon­ey work for you, min­i­miz­ing your tax oblig­a­tion and max­i­miz­ing your finan­cial sta­bil­i­ty. The Elephant’s Paycheck Blueprint elim­i­nates most fees, com­mis­sions, and and puts a plan in place to min­i­mize tax­es over the long haul too. Curious? Why not sign up for our free email course? It’s for peo­ple rolling over their 401K’s for now, but the prin­ci­ples apply to non-retire­ment invest­ing as well.