The Power of Unrealized Gains
There are definitely multiple reasons behind why patience is considered one of the most important quality of an investor. But have you ever looked at it from the perspective of the power of unrealized gains?
When a stock price increases and it is not sold, the increase in value is the unrealized gain & no capital gain tax is levied until the stock is sold. If you leave that capital gain in your portfolio, your money compounds at a much faster rate. (You will be surprised to see by how much)
Investors underestimate the power of unrealized gains when they sell their holdings often. To put things into perspective, imagine that you have invested ?2 lakhs in the stock market and you earned a 20% annual interest on it (?40,000 profit). Given that it is a lucrative return that you just earned, you sell your holdings within a year and thus, your net gain after paying your short term capital gain tax (STCG) at 15% is ?34,000 (?40,000 - ?6,000).
Now you reinvest your money i.e. ?2.34 lakhs into the stock market and it earns a 20% interest by the end of next year. You sell your holdings, pay taxes and reinvest for 23 more years in a similar fashion. By the end of the 25th year, you will have approximately ?1 Cr.
Instead, if you had invested in a portfolio of stocks that will give you 20% every year and you patiently held it for 25 years, you would have ended up with ?2 Cr (assuming you still haven't sold it).
Your money has halved during the same time horizon and with the same rate of interest only because of a 15% STCG on your profits. Not only did you lose the 15% of your profit to the government, but you also lost the 20% interest on those profits every year.
Maybe that's why patience is one of the key to be a smart investor and the reason behind Warren Buffet's holding a stock "Forever" ideology.
"Pick a share that you would want to hold forever"
P.S. - I didn't even include the transactional costs you will pay every time you buy and sell shares in those 25 years which will further reduce your net gain.
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3 年Wow, I might not know about investing But your article is relevant for bloggers too Patience is really the key.
Building Cars24 || Ex- Bain || Winner of 10+ Case Study competitions (Asian Paints, Samsung Edge, Britannia) || Summer Intern, Amazon
3 年A good article that once again brings to light the power of compounding! It's so true, that transactional costs are often ignored during the entire cycle.
Analyst at Dexter Capital Advisors | Morgan Stanley
3 年The reason why compounding is called the 8th wonder of the world!