The stock market has long been associated with getting money quick and losing money quicker.
And while this is true, you can make and lose money investing in equities, it is far from the core value prop of having ownership in the best companies in the world.
Here are three things you probably weren’t thinking about.
Tax benefits
Investment income is taxed far less than ordinary income (for now… and hopefully forever).
When you invest in stocks typically you’ll end up paying a 15% or 20% tax on the gains of your investments.
So if you invest $10,000, it grows to $20,000, and you sell it… you’ll end up owing $1500 or $2000 in taxes depending on your income.
To contrast, if you earn an incremental $10,000 of ordinary income (this could be from your paycheck or bank account… more on this in a few) you can end up owing an additional $3760 in taxes (assuming you’re at the highest marginal tax rate).
This is why all of my private equity guys love carried interest #iykyk
Dividends
Making money while you sleep (or passive income) is the holy grail of financial planning.
If all of your income is earned (active) income, then clearly you will run into issues when you can no longer earn any income (this is the entire premise of retirement planning).
What’s often overlooked in the ownership of stocks, is that the dividends they produce are arguably the most passive form of income in existence.
You click a buy button and get paid… that’s it.
Further if they’ve received qualified status (you need to hold the stock for at least 60 days in the 121 day period 60 days before the ex-dividend date… say that six times fast) or are being retained for reinvestment by the issuing company, your dividends become a more tax advantaged form of passive income than the interest earned on your savings account, which is taxed at the highest marginal tax rate you can qualify for.
Appreciation
There is only one publicly traded asset class that has produced net positive returns when adjusted for inflation and taxes:
It’s equities (stocks).
You buy ownership in a company > that company sells products and services > those products and services cost more due to inflation > the company profits > you get paid a portion of the profits relative to your ownership > your relative ownership now has greater resale value.
This phenomena does not happen when you
Put money in your high yield savings
Purchase a CD
Or invest in bonds.
Although admittedly a sound financial plan could recommend these safer alternatives for a variety of reasons… nothing has beaten owning stocks over the long term if your stated purpose is wealth building.
Cheers