“The elementary mathematics of compound interest is one of the most important models there is on earth. The first rule of compounding: Never interrupt it unnecessarily.” Charlie Munger
Compounding returns for years and even decades without having to pay taxes on interim gains (apart from taxes on dividend income) results in an investment returns advantage, versus earning similar returns in a more typical high-turnover strategy.
When it comes to compounding, more time in the market results in more wealth accumulated. If you wait to contribute to your retirement account until 10 years from now, you may have a lot more money to set aside, but you’ll also have lost 10 years of potential growth. And from the hypothetical example above, you know that extra time could potentially lead to greater returns. Of course, investing always comes with risk. Even with the power of compounding, returns are not guaranteed.
When it comes to saving and investing for the long term, there is tremendous potential power of tax-efficient compounding when it comes to long-term wealth creation.
taxes and the long-term implications taxes have on wealth accumulation.
The ability to hold an investment for years allows investments to compound in a tax-efficient manner over long periods of time. Unfortunately, the typical retail investor does not capitalize on this opportunity. In fact, the average holding period for investing in equities in the U.S. has declined for decades.
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