The Taxable Investor's Manifesto by Stuart E. Lucas

Author:Stuart E. Lucas [Lucas, Stuart E.]
Language: eng
Format: epub
ISBN: 9781119692027
Publisher: Wiley
Published: 2020-04-28T00:00:00+00:00

Notes

1 TWRs measure returns independent of cash flow. In other words, they measure the growth of a dollar invested at the beginning of a time period, throughout that time period. It assumes no additional cash flows in or out. IRRs incorporate the timing of cash flow into the return calculation. Both TWRs and IRRs are typically (but not always) presented as annualized figures. For more detailed explanation, visit www.investopedia.com.

2 Source: Wealth Strategist Partners analysis using Morningstar, Inc. data for the Vanguard 500 Index Fund Investor Shares. ©2020 Morningstar, Inc. All Rights Reserved. Reproduced with permission.

3 It's true that 100% turnover is above some measures of average active mutual fund turnover, which could be interpreted to penalize active management. To counterbalance, the model assumes no taxation at the higher short-term rates. In addition, the effect of taxation and turnover on the power of compounding is minimal until taxable turnover drops below 10 to 15%, approaching the realm of low-turnover index funds. Looked at a different way, until average holding periods in a portfolio of stocks approach 10 years or more, the difference between holding stocks a year and a day versus two years, or five years, is minimal.

4 Many managers will show their performance using a similar “growth of a dollar chart.” Just remember that these charts are accurate for tax-exempt investors only. You need to dig deeper to understand the true growth of your dollars. Mutual funds must report in their prospectuses an estimate of after-tax dollars. No other investment managers are required to do so.

5 Nathan Sosner, Rodney Sullivan, and Liliana Urrutia's article titled “Multi-Period After-Tax Reporting: A Practical Solution,” in the Journal of Wealth Management 21 (no. 3, Winter 2018) describes a methodology for after-tax reporting of hedge funds. If hedge fund managers, private equity managers, or separate account managers don't provide after-tax reporting, ask them to provide you data from the Form K-1 from a long-term investor and do your own analysis of tax impact.

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