We should not scoff at a 1.5% difference in return over a long time.
Over trading is a well known reason for underperformance and taxes would be one of the reasons why.
While it is true that “tinkering” is a form of over-trading that can generate costs of a number of types, I don’t think that is the point here. The point is to not over-think things or paralyze outsides when a critical decision should be easy to make; we want to avoid making a bad decision, or NOT making a good one, because of some detail or guideline that really, long-term, is impossible to measure in any meaningful way anyway. Before people start pulling out their abacuses to prove that you can indeed measure the difference (as the last post did), I want to point out I used the word “meaningful”. What I mean by that is simply that we make a lot of decisions for a lot of reasons and trying to look back and separate the components of each choice, in a non-biased way, to try and squeeze out an extra 1.5% return…well that way lies madness (at least for me).
Obsessive tinkering is one place we really can avoid some tax bills, but I hope none of us really believes we are just tinkering about without any other driving factor! Even learning can lead to improved returns, which tinkering probably can be attributed to anyway, if nothing else.
In my more recent experience it has been far more freeing (less stressful and easier to make a safe choice) if I just do it and not worry about making sure Quicken is up-to-date so I can see my current tax situation before selling a few shares of something for a good reason. The reason is far more likely to make or break a few % than a tax choice, long term.
E.g. if I feel XYZ is worth 14% of my portfolio today, and tomorrow I learn something that makes me feel 6% is a better allocation, I’m not going to worry about the taxes and stay in a situation that I believe is risky for that reason alone.
P.S. If I really believed I was aiming for a 10% return I would sell everything, buy some index funds and spend my time doing something else.
10K invested for 30 years at 20% return, with no further contribution turns into $2,373,763.
10K invested for 30 years at 25% return, with no further contribution turns into $8,077,936.
10K invested for 30 years at 30% return, with no further contribution turns into $26,199,956.
…I can make up more big numbers that are fun to look at…
…Knowing what the return would be if I allowed taxes to rule my decisions versus not…impossible. I would need to track a parallel reality with perfect clarity.
…I would also need to live another 30 years AND never use any of my money, which doesn’t sound very fun either.