What are frictional costs?
They are three things: trading costs, taxes, and inflation.
I hardly used to think about them, that is, until I filed taxes on my own. Neither TurboTax nor H&R Block, just me and the IRS forms.
What an education! I realized that trading in and out of stocks cost me real money.
With each sale, the IRS taxes us on capital gains: 20% for short-term gains, and 15% for long-term gains.
Then trading costs: I'm not even sure how much my broker charged me to buy or sell shares. These fees,
while seemingly phantom, are real, and worse, I have no idea how much they are costing me.
Finally, inflation is the most pernicious of the three. With each dividend I receive, inflation takes a little cut each year.
So what's an investor to do?
According to Jason Zweig: Avoid high fees and hold for long periods, which minimizes the impact of trading costs and taxes. The best thing I can do to combat inflation is invest in businesses that benefit from inflation (ex, insurance companies, banks), and avoid businesses that suffer from it (ex, auto manufacturers, AI data centers).
The goal then: Invest in wonderful businesses for the long term. If I get this right, I won't have to worry about frictional costs.
They are three things: trading costs, taxes, and inflation.
I hardly used to think about them, that is, until I filed taxes on my own. Neither TurboTax nor H&R Block, just me and the IRS forms.
What an education! I realized that trading in and out of stocks cost me real money.
With each sale, the IRS taxes us on capital gains: 20% for short-term gains, and 15% for long-term gains.
Then trading costs: I'm not even sure how much my broker charged me to buy or sell shares. These fees,
while seemingly phantom, are real, and worse, I have no idea how much they are costing me.
Finally, inflation is the most pernicious of the three. With each dividend I receive, inflation takes a little cut each year.
So what's an investor to do?
According to Jason Zweig: Avoid high fees and hold for long periods, which minimizes the impact of trading costs and taxes. The best thing I can do to combat inflation is invest in businesses that benefit from inflation (ex, insurance companies, banks), and avoid businesses that suffer from it (ex, auto manufacturers, AI data centers).
The goal then: Invest in wonderful businesses for the long term. If I get this right, I won't have to worry about frictional costs.