Wait a second before you have a meltdown over this. Hear me out, then tell me that I'm a dumbass.
It's my belief that most people turn into the Boglehead types over time because of their experiences with paying taxes on short-term capital gains and long-term capital gains. Newer investors don't have the experience with dealing with their taxes as much, so they tend to swing for the fences with shorter-term positions.
More seasoned investors tend to buy and hold, but this is a learned behavior because they know that their absolute worst case tax scenario on a long-term gain is 20 percent (federally). Of course, you only pay the 20 percent on long-term cap gains if you're income is over like 492k or something. Most end up paying about 15 percent federal tax on their long-term cap gains. Short-term cap gains seem to be taxed almost double that amount, obviously it depends on your exact tax bracket situation, but you get the point.
Thus, it's been beaten into the heads of seasoned investors that it's just smarter in the long run to hold positions for at least a year, because your tax bill is often cut in half, or almost in half. You do this long enough, and it becomes ingrained in your investing personality.
All of this makes perfect sense to me.
Ok, now let's talk about Roth IRA's. With Roth IRA's, if you're doing things correctly, there's ZERO taxes on your earnings when you're taking your money out. Obviously you need to be 59 1/2 years old and you need to have passed the 5-year rule, etc., etc.
But if ultimately there's no tax implications whatsoever for investments that are under the Roth umbrella, why do most people tend to hold things for the long-term, and be ultraconservative?
WAIT!
I already know what you're going to say, but I'm going to argue that it's nonsensical. You're going to say because Roth IRA's are designed for retirement, and when you get up to that age you should be a lot more risk adverse, because you really need this money for your retirement and you can't be screwing around, taking penitentiary chances.
However, here's my argument to that. Consider all of your investments, Roth and normal brokerages as this large bucket of water. Most people will have a Roth account and a regular brokerage account. Due the limitations on how much you can get into a Roth each year, it's likely that most people will have at least 5 to 6 times as much money in their regular brokerage accounts as their Roth accounts. For example…. Imagine somebody has 50k grand total in various Roth accounts. Maybe a standard issue Roth and a 401k Roth. But they have 250k in a “normal” brokerage account.
In this scenario, less than 17 percent of their overall investment money is in their Roth. So, the argument that they need to be ULTRA CAREFUL WITH THEIR ROTH MONEY is pretty illogical, because it's such a small percentage of their overall scenario.
Wouldn't it be tremendously more logical to actually trade that 17 percent of their account more aggressively, when it's the only 17 percent that isn't negatively affected by moving in and out of stocks?
Think about the guy that has Microsoft stock. Been holding MSFT for years. He knows the ups and downs. The peaks and valleys. He can probably tell you countless times he would have taken profits if only there wasn't a major tax consequence. So, he doesn't take profits when the stock gets ahead of itself, and then buy back in during a retracement. But his reasoning is tax implications. Inside a Roth, there's no tax implications. Thus, this same investor could sell out of MSFT when he thinks it's gotten ahead of itself, and then buy back in during a retracement and end up with more overall shares. All with no taxable implications whatsoever.
Now obviously, nobody can predict the future and sometimes people are going to get it wrong. They'll sell MSFT when they think the stock has gotten way ahead of itself and then it continues to go on a tear and now he can't buy back in and still have the same number of shares.
But by the same token, just talk to any Amazon investor over the last three years. That shit has basically gone pretty much nowhere for a three-year period. So the whole buy and hold forever strategy hasn't worked out that great for AMZN holders.
It cuts both ways. Don't just cherry pick the example of it hurting.
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