|
Small Portfolio
|
XLF & IAU
|
20.00%
|
|
|
Sector
|
XLF
|
32.67%
|
|
|
Secular
|
IAU
|
7.33%
|
|
|
Large Portfolio
|
Date
|
Return
|
Days
|
|
RIMM
|
7/16/2012
|
64.83%
|
173
|
|
SEAC
|
9/25/2012
|
24.24%
|
102
|
|
CAJ
|
9/25/2012
|
14.10%
|
102
|
|
DDAIF
|
9/25/2012
|
7.90%
|
102
|
|
CFI
|
10/31/2012
|
38.80%
|
66
|
|
RE
|
11/26/2012
|
7.79%
|
40
|
|
CGX
|
12/12/2012
|
5.89%
|
24
|
|
PAAS
|
12/20/2012
|
3.58%
|
16
|
|
OKE
|
12/28/2012
|
5.24%
|
8
|
|
STRA
|
12/31/2012
|
10.01%
|
5
|
|
S&P
|
Annualized
|
5.54%
|
|
|
Small Portfolio
|
Annualized
|
12.06%
|
|
|
Sector Model
|
Annualized
|
19.30%
|
|
|
Large Portfolio
|
Annualized
|
30.23%
|
Rotation: selling STRA; buying BWS (Brown Shoe Company).
I’ll take 10% in a week.
Why not?
In any case, I’ll start with a correction from the other
day. One of the advantages of having a
blog is that people can let you know when you are wrong. Turns out that the dividend taxes didn’t go
up to 43.80% (as Obama wanted), but rather to 23.80%. So, my Effective Tax Rate numbers were
off. The correct numbers are:
|
Years
|
Growth Taxes
|
Annualized
|
Dividend Taxes
|
Effective Tax Rate
|
|
0
|
43.80%
|
43.80%
|
0.62%
|
43.80%
|
|
1
|
23.80%
|
23.80%
|
0.62%
|
24.42%
|
|
2
|
23.80%
|
11.27%
|
0.62%
|
11.88%
|
|
3
|
23.80%
|
7.38%
|
0.62%
|
7.99%
|
|
4
|
23.80%
|
5.48%
|
0.62%
|
6.10%
|
|
5
|
23.80%
|
4.36%
|
0.62%
|
4.98%
|
|
6
|
23.80%
|
3.62%
|
0.62%
|
4.24%
|
|
7
|
23.80%
|
3.10%
|
0.62%
|
3.72%
|
|
8
|
23.80%
|
2.70%
|
0.62%
|
3.32%
|
|
9
|
23.80%
|
2.40%
|
0.62%
|
3.02%
|
|
10
|
23.80%
|
2.16%
|
0.62%
|
2.78%
|
|
11
|
23.80%
|
1.96%
|
0.62%
|
2.58%
|
|
12
|
23.80%
|
1.80%
|
0.62%
|
2.41%
|
|
13
|
23.80%
|
1.66%
|
0.62%
|
2.27%
|
|
14
|
23.80%
|
1.54%
|
0.62%
|
2.16%
|
|
15
|
23.80%
|
1.43%
|
0.62%
|
2.05%
|
|
16
|
23.80%
|
1.34%
|
0.62%
|
1.96%
|
|
17
|
23.80%
|
1.26%
|
0.62%
|
1.88%
|
|
18
|
23.80%
|
1.19%
|
0.62%
|
1.81%
|
|
19
|
23.80%
|
1.13%
|
0.62%
|
1.75%
|
|
20
|
23.80%
|
1.07%
|
0.62%
|
1.69%
|
The 0.62% for Dividend taxes is the percent from your total
stock holdings, assuming an average Dividend payout of 2.6%. In other words, 23.8% (tax rate) on 2.6%
(typical annual dividend) is about 0.62% of your total holdings.
I appreciate the tip I got so I could correct my numbers.
Now, I do want to reconcile two previous blogs, because I’d
like to offer an idea of how the AGGREGATE of investor behavior can change even
though the INDIVIDUAL investor may not.
You may recall:
On that post I calculated the optimal Capital Gains tax rate
to maximize government tax revenue, assuming that investor behavior stayed the
same regardless of the tax rate.
Then a few days ago:
Here I suggested that aggregate investor behavior would in
fact change, and that the average holding period for stocks would lengthen now
that Capital Gains rates have been raised.
My idea is that the aggregate behavior would change even
though each individual’s behavior may not.
Here’s the idea:
Let’s assume that the average holding period on stocks is 9
months. The average investor will pay
short term capital gains.
But averages are based on a spectrum of investors who each
hold stocks for different periods of time.
Women, for instance, typically hold stocks for longer than men – which
is why the average woman does better than the average man in the market.
So, let’s simplify this and reduce the entire market to just
two people, Mr. and Mrs. Jones. When
they got married, Mr. Jones had ten times as much money as Mrs. Jones. He normally holds stocks for 3 months and his
wife normally holds stocks for 6 years. On
AVERAGE the married couple is paying at a short term capital gains rate.
Now, let’s assume that they each make 15% a year in the
stock market, but Mr. Jones pays 43.80% in taxes, while Mrs. Jones only pays 4.24%
per year in taxes, because she is paying at a 23.80% RATE but only after six
years of compounding, giving her a 4.24% annualized tax rate (see the table
above).
They invest that money for their entire careers and this is
what happens:
|
Years
|
Mr. Jones
|
Mrs. Jones
|
Average months held
|
Average Tax Rate
|
|
(3 months)
|
(6 years)
|
(per dollar)
|
His 43.8% and her 4.24%
|
|
|
1
|
$100,000.00
|
$10,000.00
|
9
|
40.20%
|
|
2
|
$108,430.00
|
$11,436.40
|
10
|
40.03%
|
|
3
|
$117,570.65
|
$13,079.12
|
10
|
39.84%
|
|
4
|
$127,481.85
|
$14,957.81
|
10
|
39.65%
|
|
5
|
$138,228.58
|
$17,106.35
|
11
|
39.44%
|
|
6
|
$149,881.24
|
$19,563.51
|
11
|
39.23%
|
|
7
|
$162,516.23
|
$22,373.61
|
11
|
39.01%
|
|
8
|
$176,216.35
|
$25,587.35
|
12
|
38.78%
|
|
9
|
$191,071.39
|
$29,262.72
|
12
|
38.55%
|
|
10
|
$207,178.71
|
$33,466.02
|
13
|
38.30%
|
|
11
|
$224,643.87
|
$38,273.08
|
13
|
38.04%
|
|
12
|
$243,581.35
|
$43,770.62
|
14
|
37.77%
|
|
13
|
$264,115.26
|
$50,057.83
|
14
|
37.50%
|
|
14
|
$286,380.18
|
$57,248.14
|
14
|
37.21%
|
|
15
|
$310,522.02
|
$65,471.26
|
15
|
36.91%
|
|
16
|
$336,699.03
|
$74,875.55
|
16
|
36.60%
|
|
17
|
$365,082.76
|
$85,630.68
|
16
|
36.28%
|
|
18
|
$395,859.24
|
$97,930.67
|
17
|
35.95%
|
|
19
|
$429,230.17
|
$111,997.43
|
17
|
35.61%
|
|
20
|
$465,414.27
|
$128,084.74
|
18
|
35.26%
|
|
21
|
$504,648.70
|
$146,482.84
|
19
|
34.90%
|
|
22
|
$547,190.58
|
$167,523.63
|
19
|
34.53%
|
|
23
|
$593,318.75
|
$191,586.72
|
20
|
34.14%
|
|
24
|
$643,335.52
|
$219,106.24
|
21
|
33.75%
|
|
25
|
$697,568.70
|
$250,578.66
|
21
|
33.34%
|
|
26
|
$756,373.74
|
$286,571.78
|
22
|
32.93%
|
|
27
|
$820,136.05
|
$327,734.95
|
23
|
32.51%
|
|
28
|
$889,273.52
|
$374,810.80
|
23
|
32.07%
|
|
29
|
$964,239.28
|
$428,648.62
|
24
|
31.63%
|
|
30
|
$1,045,524.65
|
$490,219.71
|
25
|
31.17%
|
|
31
|
$1,133,662.38
|
$560,634.87
|
26
|
30.71%
|
|
32
|
$1,229,230.11
|
$641,164.46
|
27
|
30.24%
|
|
33
|
$1,332,854.21
|
$733,261.33
|
27
|
29.76%
|
|
34
|
$1,445,213.82
|
$838,586.98
|
28
|
29.27%
|
|
35
|
$1,567,045.35
|
$959,041.62
|
29
|
28.78%
|
|
36
|
$1,699,147.27
|
$1,096,798.35
|
30
|
28.28%
|
|
37
|
$1,842,385.38
|
$1,254,342.47
|
31
|
27.78%
|
|
38
|
$1,997,698.47
|
$1,434,516.22
|
32
|
27.27%
|
|
39
|
$2,166,104.45
|
$1,640,570.13
|
33
|
26.75%
|
|
40
|
$2,348,707.06
|
$1,876,221.63
|
34
|
26.23%
|
|
41
|
$2,546,703.06
|
$2,145,722.10
|
35
|
25.71%
|
|
42
|
$2,761,390.13
|
$2,453,933.62
|
35
|
25.19%
|
|
43
|
$2,994,175.32
|
$2,806,416.65
|
36
|
24.66%
|
|
44
|
$3,246,584.30
|
$3,209,530.33
|
37
|
24.13%
|
|
45
|
$3,520,271.36
|
$3,670,547.27
|
38
|
23.61%
|
Three things happen here.
First, Mrs. Jones has more money when they retire.
Second, the AVERAGE HOLDING PERIOD FOR EACH DOLLAR goes up
from 9 months to 38 months, even though they never changed their individual
behavior.
Third, the average tax RATE they pay as a couple goes down
every year, from 40.20% to 23.61%.
So, then, this is my thesis: INDIVIDUAL behavior does not
have to change in order for MARKET behavior to change. The market is measured in dollars, not
people.
Liberals like to assume that the market is a zero sum game,
and Conservatives like to assume that investors will rationally calculate what
is in their best interest.
I think they are both wrong.
Liberals are probably right that individuals don’t pay
enough attention to get out of the tax man’s way.
But Conservatives are probably right that aggregate behavior
will change when tax rates change. By
raising rates, short term investors will be punished more than long term
investors, and the money in the market will shift even faster toward longer and
longer holding periods.
Some months ago Paul Krugman pointed out on his own blog
that the market doesn’t seem to be affected by changes in capital gains
rates. What he failed to account for is
the fact that the market ADAPTS to these different rates by changing aggregate
behavior, even though individual behavior might stay the same.
The market functions in a Darwinian process, shifting money
toward those who by accident or plan adopt trading strategies that are better
fit for the environment the government has altered. Those that do not adapt will see their
retirement accounts go extinct.
The purpose of this blog is to study such accidents so that
we can learn from other people’s mistakes rather than our own.
Some animals accidentally grow fangs.
Other animals use their brains to create swords.
Either way works.
Tim
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