Why Two Investors With the Same Returns Can End Up With Very Different Wealth

It’s one of the quiet contradictions of long-term investing: two people can make the same decisions, earn the same market returns, and still arrive at very different outcomes. Not slightly different—sometimes meaningfully, even dramatically so. When that happens, the explanation usually isn’t stock selection or market timing. It’s taxes.

Most investors understand taxes as something that happens when you sell. What they underestimate is how tax decisions made along the way quietly shape the compounding process itself. Over decades, the way taxes are managed—or ignored—can matter almost as much as what you invest in. Tax loss harvesting sits at the center of that difference, even though many investors barely think about it.

To see how this plays out, imagine two investors who, on the surface, look identical.

Both start investing in their early thirties. Both build diversified portfolios of public equities and rebalance occasionally. Neither tries to outsmart the market, and both earn roughly the same pre-tax returns year after year. If you looked only at their performance charts, you’d struggle to tell them apart.

Yet twenty or thirty years later, one ends up with significantly more after-tax wealth.

The difference is not luck. It’s process.

The first investor follows what most people would consider a sensible, long-term approach. They buy quality investments, reinvest dividends, and stay invested through market cycles. When they need to sell—whether to rebalance or fund a life expense—they do so and pay whatever capital gains taxes are owed. Losses, when they appear, are viewed as temporary setbacks. The assumption is that markets recover, so selling at a loss feels unnecessary or even counterproductive.

This investor isn’t careless. They’re simply passive when it comes to taxes.

The second investor owns nearly the same portfolio. The holdings look familiar. The risk profile is similar. The long-term outlook hasn’t changed. What’s different is how this investor treats losses when they occur. Instead of ignoring them, they view those losses as tools.

When parts of the portfolio dip below their purchase price—sometimes meaningfully, sometimes only modestly—the second investor uses tax loss harvesting to realize those losses and reinvest into comparable exposure. The goal isn’t to exit the market or make a directional bet. It’s to maintain the same investment posture while capturing a tax asset along the way.

Over time, this approach begins to change the internal structure of the portfolio in subtle but powerful ways.

Each harvested loss offsets current or future capital gains. In some years, it reduces taxable income outright. But perhaps most importantly, it steadily raises the portfolio’s cost basis. Positions that might have otherwise carried low embedded gains are refreshed. When sales eventually occur—whether for rebalancing, spending, or estate planning—the tax bill is smaller than it would have been otherwise.

None of this shows up in annual performance reports. There’s no extra alpha to point to, no clever trade to brag about. The market returns are the same. The difference only becomes obvious when taxes are finally tallied.

This is where the compounding effect of tax loss harvesting begins to reveal itself. Taxes paid earlier in an investing life don’t just reduce wealth in that moment; they remove capital that could have remained invested for decades. Once that money leaves the portfolio, it never compounds again. Over long horizons, that lost compounding quietly widens the gap between investors who actively manage taxes and those who don’t.

The investor who consistently harvests losses keeps more capital working. The one who ignores them accepts tax drag as inevitable. Over time, the difference becomes structural.

What makes this especially unintuitive is that the second investor doesn’t need dramatic market events to benefit. Major crashes certainly create large harvesting opportunities, but they’re not where most of the value comes from. Ordinary volatility—sector rotations, rate-driven pullbacks, short-term corrections—creates a steady stream of small, harvestable losses. Captured consistently, those losses add up.

This is also why many investors underestimate the value of tax loss harvesting. Doing it occasionally, during obvious downturns, feels sufficient. In reality, most of the benefit comes from repetition and discipline, not from timing rare crises.

The challenge, of course, is execution. Monitoring portfolios continuously, tracking cost basis across lots, avoiding wash sale violations, and reinvesting in a way that preserves exposure is not trivial. For most individuals, doing this manually over decades is unrealistic. That’s why so many investors default to the first approach—not because it’s optimal, but because it’s simpler.

Automated tax loss harvesting changes that equation. By systematizing what is otherwise a complex and error-prone process, it allows investors to capture losses whenever they appear without emotional decision-making or constant oversight. The strategy becomes boring by design, which is precisely why it works.

In the end, the lesson is straightforward but easy to miss. Market returns matter, but they don’t tell the full story. After-tax outcomes are what investors actually live on, and those outcomes are shaped as much by process as by performance. Tax loss harvesting doesn’t change what you invest in. It changes what you keep.

Two investors can do everything “right” and still finish far apart. The difference isn’t brilliance or bravery. It’s whether taxes were treated as an afterthought—or as something worth managing with the same care as the portfolio itself.