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Impact of taxes on the best trader ever...
07-09-2014, 02:26 PM
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#1
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Dryer sheet aficionado
Join Date: Jan 2012
Posts: 26
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Impact of taxes on the best trader ever...
While I know that this is "preaching to the choir" for most of us, I'll admit to keeping a very small portion of "fun money" to invest in an attempt to beat the market. Observations like this make me question even that...
Let’s say you’re the best trader ever… | The Reformed Broker
(Original is The Irrelevant Investor — Are you the best trader ever? )
The (very short) article looks at the performance of someone who invests $10,000 in the S&P 500 in 1990 and holds through 2013, versus an active trader who beats the S&P 500 by 40% *each year* and what happens to that same $10,000 after short-term captial gains (STCG) are factored in.
I think everyone can guess the results, but I was still surprised by the magnitude:
- Buy and hold: $76,266
- Best investor ever, paying STCG but ignoring trading fees: $69,197
I'm not sure what sort of tax bracket they assume, but I would have expected more from that sort of consistent market-beating returns!
Lurking
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07-10-2014, 09:00 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Location: Northern IL
Posts: 26,896
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Interesting, thanks for posting.
On one hand, I think most of us would be aware of the short-term gains versus LTCG, but that article and a quick calculation makes it jump up and slap you (well, me!) in the face!
Of course, some trading can be more medium-term, and stretched to a year plus a day.
Looks like they used 30% to amplify the effect, but even comparing 25% marginal ST to 15% LT, you would need to outperform by 13.33% just to 'break even'.
-ERD50
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07-10-2014, 09:18 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: Williston, FL
Posts: 3,925
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And the truth be known, most non-professional traders cannot even beat the rate of inflation. But at least their taxes are low...
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07-10-2014, 09:46 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2012
Location: Seattle
Posts: 6,023
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Hmmm, do it in an IRA?
I started with under $2000 and now have over $80,000 in my IRA in 14 years.
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07-11-2014, 03:58 AM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2006
Posts: 7,733
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Quote:
Originally Posted by Lurking
While I know that this is "preaching to the choir" for most of us, I'll admit to keeping a very small portion of "fun money" to invest in an attempt to beat the market. Observations like this make me question even that...
Let’s say you’re the best trader ever… | The Reformed Broker
(Original is The Irrelevant Investor — Are you the best trader ever? )
The (very short) article looks at the performance of someone who invests $10,000 in the S&P 500 in 1990 and holds through 2013, versus an active trader who beats the S&P 500 by 40% *each year* and what happens to that same $10,000 after short-term captial gains (STCG) are factored in.
I think everyone can guess the results, but I was still surprised by the magnitude:
- Buy and hold: $76,266
- Best investor ever, paying STCG but ignoring trading fees: $69,197
I'm not sure what sort of tax bracket they assume, but I would have expected more from that sort of consistent market-beating returns!
Lurking
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He miss a pretty important factor the short-term trader $69,197 is after tax. Where are as the buy&hold investor still owes taxes on the difference between the $76,266 and $10,000 = at 15% that $9939 worth of taxes and 20% it is $13,253 in either case the short term has more money after taxes. It is even worse if you live in a state like CA that doesn't have treat capital gains favorably.
Honestly I'd have to see the math because I seriously doubt it would be that close, when you factor in things like capital gain and loss carry forwards.
Plus why not just do all your trading in an IRA.
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07-11-2014, 05:43 AM
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#6
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Thinks s/he gets paid by the post
Join Date: Nov 2013
Posts: 1,049
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Quote:
Originally Posted by Fermion
Hmmm, do it in an IRA?
I started with under $2000 and now have over $80,000 in my IRA in 14 years.
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+1
I have my play money in a roth IRA.
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07-11-2014, 06:58 AM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Location: Northern IL
Posts: 26,896
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Quote:
Originally Posted by Fermion
Hmmm, do it in an IRA? ...
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Not an option for some, but if it is, I agree. Makes tax time much simpler as well.
-ERD50
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07-11-2014, 08:01 AM
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#8
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Thinks s/he gets paid by the post
Join Date: Aug 2006
Posts: 2,433
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Quote:
Originally Posted by clifp
He miss a pretty important factor the short-term trader $69,197 is after tax. Where are as the buy&hold investor still owes taxes on the difference between the $76,266 and $10,000 = at 15% that $9939 worth of taxes and 20% it is $13,253 in either case the short term has more money after taxes. It is even worse if you live in a state like CA that doesn't have treat capital gains favorably.
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+1
Another example of incomplete analysis in the financial press.
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I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
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07-11-2014, 09:34 AM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Location: Northern IL
Posts: 26,896
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Quote:
Originally Posted by Fermion
Hmmm, do it in an IRA? ....
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After thinking about this some more, the IRA simplifies taxes, but does it really help with ST vs LT gains?
All the gains in a trad IRA will be taxed as income when you take it out (but not in the year it was 'realized' - fuzzy term for an IRA, but you know what I mean).
The ROTH was taxed on the way in, so effectively has less to grow.
-ERD50
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07-18-2014, 06:48 PM
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#10
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Thinks s/he gets paid by the post
Join Date: Sep 2006
Posts: 2,844
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After looking at this I am pretty sure in the buy and hold they include dividends and exclude them for best trader ever, pretty much eliminating the outperformance
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But then what do I really know?
https://www.early-retirement.org/forums/f44/why-i-believe-we-are-about-to-embark-on-a-historic-bull-market-run-101268.html
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07-27-2014, 08:59 AM
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#11
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,726
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Update
Recalling this recent thread, I saw this morning Barry Rithotz published it in his weekly WP column ( here). In this version he included an excel worksheet with the data, which might help determine if taxes were considered consistently across the different scenarios.
Just an fyi for anyone interested
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07-28-2014, 08:39 AM
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#12
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Thinks s/he gets paid by the post
Join Date: Jun 2004
Location: Diablo Valley (SF Bay Area)
Posts: 2,705
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I do my long term investing in the IRA & Roth. Totally core mentally here:
- SPY 50%
- SCHD 30%
- SCHA 10%
-PID 10%
I leave all the 'fun' explore trading for 1/2 the brokerage account.
Input wanted: adviser keeps saying to be 20-30% bonds but with them being at an all time low (and the fact that I don't understand them) I just keep my CDs paying an average 3%
What would you do? Keep as is - sell CDS on secondary market and put into bonds- put extra cash into bonds (LT vs ST)??
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01-10-2015, 09:22 AM
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#13
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Recycles dryer sheets
Join Date: Apr 2013
Posts: 252
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Well I had same view as you and chose 3% pen fed CDs last year and looking at 2.25% Barclays CDs this year. I think tips can make sense from what I read but I don't have any. I don't understand why fido doesn't have better CDs and bond buy options
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