Impact of taxes on the best trader ever...

[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

 

[ERD50]

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

 

[Senator]

And the truth be known, most non-professional traders cannot even beat the rate of inflation. But at least their taxes are low...

 

[Fermion]

Hmmm, do it in an IRA?

I started with under $2000 and now have over $80,000 in my IRA in 14 years.

 

[clifp]

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

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.

 

[NgineER]

Hmmm, do it in an IRA?

I started with under $2000 and now have over $80,000 in my IRA in 14 years.

+1

I have my play money in a roth IRA.

 

[ERD50]

Hmmm, do it in an IRA? ...

Not an option for some, but if it is, I agree. Makes tax time much simpler as well.

-ERD50

 

[FIRE'd@51]

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.

+1

Another example of incomplete analysis in the financial press.

 

[ERD50]

Hmmm, do it in an IRA? ....

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

 

[Running_Man]

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

 

[MichaelB]

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

 

[gayl]

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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[Rothman]

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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