[DesertCat]

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Is this true for stocks? It was my understanding that If you buy stocks, you will only have to pay capital gains once you sell the stock (but any dividends would be taxable that year),

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This is true, but the problem is most people turn over (sell stocks in) their portfolio too much. If you can hold for a year, you benefit from very low long term capital gains. But even if your holding period is 1 year + 1 day, you essentially are taking an annual 15% + state tax haircut on your gains. That's close to 20% in Arizona. If you hold for two years, you give up the same percentage (and pay close to the same total tax), but the extra year of compounding slightly increases your return. It's still close to a 20% haircut in the short run, but lessens over time.

And if your holding period is less than 1 year, you are paying your total income tax rate (state + fed) which is likely 30% or more.

In my example, I used 20% (10%-2%) as a "blended" rate to cover the gamut. But if you are an active trader, an annual 30% tax obligation means after 20 years you have $154k instead of $270k (by trading in a tax free account). It's the power of compounding.

If you own an index fund in a taxable account, the tax costs should be much less. The index only sells stocks when they "rebalance" and it should be such a tiny portion that you won't end up with much in the way of yearly capital gains. You'll have some taxable dividends, sure, but I'd be surprised if taxable gains and dividends totaled even 2% per year. After tax (mostly 15% divi taxes) that would only lower your 10% gain to around 9.6% or so.