Psychology of Buy and Hold Investing

One of the major strengths of Buy & Hold investing is the minimization of taxes. When you are buying and holding assets, you are NOT selling them for gain or loss. This results in very minimal capital gains taxes if you simply buy and hold an asset for a long period of time. Please note that you will always have some capital gains taxes because funds move in and out of the mutual funds. If you hold index mutual funds, then fewer funds move in and out of the fund. However, if you hold an actively managed mutual fund, then the professional fund managers will actively buy and sell stocks to generate returns. This is a part you cannot control. However, your own buying and selling is under your control.

One of the pitfalls of Active trading the amount of buying and selling an investor is tempted or required to do in order to keep up with market dynamics. The more frequently you trade, the more you would incur in capital gains taxes. If you trade for a loss, then it is a loss of your money. You are also required to to pay transactional costs for each buy and sell order resulting in further costs.

Capital gains from assets held one year or less is taxed at the ordinary income tax rates for that year which could range from 10% to 35% depending on your income level. If you held assets longer than one year, then your long term capital gains taxes depends which ordinary income tax bracket you fall under. 0% rate if your total income places you in the 10 or 15% tax brackets; 15% rate if your total income places you in the 25% tax bracket or higher.

If you are totally new to this concept, please read A Simple Guide to Buy & Hold Investing.