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Two Essays on Investing and Taxes


racemize
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Hi All, I've just finished my second essay on the effects of taxes on investing.  I'm posting both, since one is the foundation for the second.  If you see any typos, let me know, there might still be some hanging around.  Hopefully, this is of some use to you fine folks.

 

First Essay:

"Holding Period, Taxes, and Required Performance":

https://www.dropbox.com/s/yvmnoyo7v7nseov/2013-09-22%20Holding%20Period%20Essay.pdf

 

Second Essay:

"The Hurdle for Active Investors":

https://www.dropbox.com/s/sk01jpe257e8rgy/2014-03-25%20Hurdle%20for%20Active%20Investors.pdf

 

Disclaimer: This is not an advertisement of any sort.  I am only posting this as I thought my work on this topic might be of some interest to forum members.

 

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I realized I should have put some context for these things, here's descriptions:

 

Holding Period, Taxes, and Required Performance:

This essay focuses on the impact of taxes on pre-tax returns over various holding periods, from less than a year to 20 years. Initially, the essay shows the required pre-tax returns required to generate 10, 12, 15, and 20 percent after-tax returns for holding periods from 1 year to 20 years. After some discussion of this relationship, the essay then turns to holding periods of less than a year, and similarly calculates required pre-tax returns to generate 10, 12, 15, and 20 percent after-tax returns at different tax rates from 20% to 39.6%.

 

The Hurdle for Active Investors:

Building on "Holding Period, Taxes, and Required Performance", this essay focuses on determining how much an active investment must outperform a passive investment, such as an index fund, over the same investment period under various situations. Initially, the essay determines appropriate scenarios for comparing the active investor to the passive investor, based on a history of returns and dividend yields from 1871 to 2013. After determining these scenarios, a representative set of variables, including annualized gains, turnover, investment period, dividend yield, and tax rate, are modeled in order to determine the hurdle for the active investor.

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