Two portfolios with the same monthly contribution. One is left alone, while the other is sold and rebought a few times a year. The difference worsens the longer you're invested, and the more you buy and sell.
Over 20 years, doing nothing is worth
$17,292(20% more)
Same contributions, same market. The only difference is how often you touched it.
Hold, never sell
$104,185
Sell & rebuy
$86,894
Assumes a steady 7.0% average annual return with no volatility, $48,000 total contributed over 20 years, and short-term capital gains tax of 22% paid on gains realized at every sell-and-rebuy point.
Both lines earn the exact same return. The entire gap is tax, not bad timing, so treat it as a floor rather than a worst case. This drag applies in a taxable brokerage account. Inside a Roth IRA or 401(k), selling does not trigger capital gains tax and this cost largely goes away. Illustrative only, not tax advice.
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Educational tool only. Not financial or tax advice. Consider a licensed tax professional before making decisions based on this.