Writings

What Are We Actually Trying to Maximize?

Would you rather realize a $500,000 tax-free investment profit, or realize $1 million pretax profit and pay $400,000 in taxes?

Assuming an initial investment of $1 million in both cases, with identical risk, liquidity, and time horizon:

  • Option A: $500,000 profit – $0 taxes = $500,000 net return
  • Option B: $1,000,000 profit – $400,000 taxes = $600,000 net return

Option B is obviously the right choice. Yet in the real world, decisions like this stall all the time because of an irrational aversion to paying taxes. As personal finance author Nick Maggiulli wrote recently, people often hate paying taxes more than they like making money1.

Warren Buffett articulated this tension perfectly in a 1965 letter to his partners2:

“What is one really trying to do in the investment world? Not pay the least taxes, although that may be a factor to be considered in achieving the end. Means and end should not be confused, however, and the end is to come away with the largest after-tax rate of compound.”

That distinction is everything. Smart investing means keeping your eye on expected long-term returns after fees, costs, and taxes are paid.  

The Problem with Holding Single Stocks

For many wealthy families, this dilemma appears most clearly when deciding what to do with appreciated stock positions.

Maybe you built the position over a long career at a single company, or maybe an early investment grew until it became a large portion of your portfolio. Selling triggers a large, immediate tax bill, so the natural reaction is to just keep holding.

The catch is simple: the tax bill from selling is easy to calculate, but the cost of holding on is almost invisible.

If that company struggles or even just lags the broader market over the next decade, the opportunity cost can easily eclipse the upfront tax bill you avoided. You end up with less total wealth simply because you didn’t want to write a check to the IRS.  

What the Numbers Say

Of course, a single stock might keep beating the market. But the data shows why betting on that is a risky strategy.

Academic research on individual stock performance shows a clear pattern3:

  • The median 10-year return for an individual stock underperforms the broader market by 8% (-0.82% per year).
  • For stocks that performed in the top 20% over the previous five years, the median 10-year return falls to 18% underperformance (-1.94% per year).
  • Since 1945, stocks in that top 20% bracket have underperformed the market over the next decade 93% of the time.

A Quick Example

Say you have a $20 million portfolio with a $5 million position (25%) in your former employer’s stock:

  • Unrealized Gain: $3 million
  • Upfront Tax Bill to Sell: ~$714,000 (reflecting a 20% federal long-term capital gains rate plus the 3.8% Net Investment Income Tax)4
  • Reinvestable Proceeds: ~$4.286 million placed into a low-cost index fund

If your former employer’s stock underperforms the index by 2% per year over the next decade (consistent with historical data noted above), you still end up with more wealth after 10 years by taking the tax hit upfront and diversifying today5.

The Bottom Line

Ripping the band-aid off and selling everything at once isn’t always the right first move. Strategies like gradual selling, tax-loss harvesting, and charitable gifting can all help soften the blow. But running the numbers on a full liquidation gives you an honest baseline for what doing nothing actually costs.

Tax planning matters, but is only one piece of the puzzle. The goal isn’t to minimize the check you write to the government; it’s to maximize your net worth and quality of life over the long haul.

Have questions about managing an appreciated stock position? Contact us today to discuss tax-aware strategies for your specific situation.

Footnotes & Compliance Disclosures

References & Sources:

  1. Maggiulli, N. (2023). Living Rich to Die Poor. Of Dollars and Data. (As cited in A Wealth of Common Sense, “People Hate Paying Taxes More Than They Like Making Money,” Sept. 2026).
  2. Buffett, W. E. (1965, November 1). Letter to Limited Partners, Buffett Partnership, Ltd.
  3. Petajisto, A. (2023, June 30). Underperformance of Concentrated Stock Positions. SSRN Working Paper No. 4541122. Available at SSRN: https://ssrn.com/abstract=4541122.
  4. Assumes the highest federal long-term capital gains tax rate of 20% plus the 3.8% Net Investment Income Tax (NIIT) under Internal Revenue Code (IRC) Section 1411, yielding an effective federal capital gains rate of 23.8% on $3,000,000 of realized gains ($3,000,000 × 23.8% = $714,000).
  5. Compounded hypothetical growth illustration based on static multi-period return assumptions net of initial tax drag.

Important Disclosures & Disclaimer:

  • Hypothetical Example Notice: The numerical examples provided in this article are purely hypothetical and are for illustrative and educational purposes only. They do not represent actual trading, investment performance, or the experiences of any specific investor. Actual investment results, market performance, and compounding rates will vary.
  • Tax Disclosure: This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Federal tax rates mentioned do not account for state or local income taxes, state capital gains taxes, the Alternative Minimum Tax (AMT), or individual taxpayer tax bracket nuances. You should consult your own tax professional, CPA, or legal advisor before engaging in any transaction or executing diversification strategies.
  • Investment Risk Disclosure: Diversification and asset allocation strategies do not ensure a profit or protect against loss in declining markets. Past performance of individual stocks or market indices is no guarantee of future results. Rebalancing or selling assets may generate tax liabilities.