One of the advantages of the PP relative to other portfolios is its tax efficiency. Has anyone tried to quantify this? For example, there was a thread a while ago about Mebane Faber's analysis showing the (timed) Ivy portfolio beating PP since 1972 (and "timed" PP beating PP as well). This comparison (like most) was presumably based on frictionless returns (no tax, no trading costs). Given a large enough portfolio trading costs become relatively insignificant, so I'm OK with a "no trading costs" analysis - but "no tax" means the comparison is only valid in an IRA or 401K sort of account.
A comparison including tax effects would involve a number of assumptions (tax bracket, specific holdings, etc.). Has anyone attempted to do this? For example, I suspect PP would have done better than Ivy since 1972 in a taxable account. With the right data (monthly price data for each asset, plus dividend/interest amounts), it seems like this wouldn't be too difficult to do.
Historical returns including tax
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Re: Historical returns including tax
I think an after-tax analysis requires far too many assumptions.
Add to your list, deduct vs std deduction, single vs married joint vs married individual vs HoH, loss carryover or not, scheduled vs. triggered rebalance, adding to vs taking from vs isolated portfolio, and probably more.
Probably your best best is use the average annual turnover number expressed as a percentage of assets. This is typically published for mutual funds and it seems like I've seen a number for the PP, but I don't recall what is. Ivy? No idea.
If the average turnover is 10%, figure you'll be taxed on about 10% of the annual gains every year. So if you have a $1,000,000 portfolio, and the return is 12%, your gain is $120,000. 10% of that is $12,000. Expect around that much in gains to be added to your taxable income. Unfortunately you don't know if the gains for a year will come from gold (collectible tax) or stock (LTCG tax) or what.
If using triggered rebalance the annual average turnover will be mostly meaningless. ISTR in that case the PP only rebalances only 2 or 3 times per 10 years. And if you are adding to the portfolio you can probably avoid at least one of those.
Add to your list, deduct vs std deduction, single vs married joint vs married individual vs HoH, loss carryover or not, scheduled vs. triggered rebalance, adding to vs taking from vs isolated portfolio, and probably more.
Probably your best best is use the average annual turnover number expressed as a percentage of assets. This is typically published for mutual funds and it seems like I've seen a number for the PP, but I don't recall what is. Ivy? No idea.
If the average turnover is 10%, figure you'll be taxed on about 10% of the annual gains every year. So if you have a $1,000,000 portfolio, and the return is 12%, your gain is $120,000. 10% of that is $12,000. Expect around that much in gains to be added to your taxable income. Unfortunately you don't know if the gains for a year will come from gold (collectible tax) or stock (LTCG tax) or what.
If using triggered rebalance the annual average turnover will be mostly meaningless. ISTR in that case the PP only rebalances only 2 or 3 times per 10 years. And if you are adding to the portfolio you can probably avoid at least one of those.
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MachineGhost
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Re: Historical returns including tax
I don't know if this was brought up before in here, but all simple market timing methods do not beat buy and hold when historical transaction costs are included. Transaction costs include commissions, the spread and market impact. Transaction costs were relatively high until about the last decade.rickb wrote: One of the advantages of the PP relative to other portfolios is its tax efficiency. Has anyone tried to quantify this? For example, there was a thread a while ago about Mebane Faber's analysis showing the (timed) Ivy portfolio beating PP since 1972 (and "timed" PP beating PP as well). This comparison (like most) was presumably based on frictionless returns (no tax, no trading costs). Given a large enough portfolio trading costs become relatively insignificant, so I'm OK with a "no trading costs" analysis - but "no tax" means the comparison is only valid in an IRA or 401K sort of account.
So before you worry about taxes, worry about transaction costs. Before ERISA gave stocks legitimacy in the 60's (MT can correct me if I'm wrong), Wall Street was considerered to be a casino by the mainstream public. It had no respectability whatsoever. The only difference between now and then is better marketing.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Historical returns including tax
Are you saying that if you include transaction costs Faber is simply incorrect in his assertion, per http://papers.ssrn.com/sol3/papers.cfm? ... _id=962461, that adding 10 month MA timing to nearly anything reduces risk and improves returns? Are there sources you can point to for this opinion?MachineGhost wrote: I don't know if this was brought up before in here, but all simple market timing methods do not beat buy and hold when historical transaction costs are included. Transaction costs include commissions, the spread and market impact. Transaction costs were relatively high until about the last decade.
Re: Historical returns including tax
I had a spreadsheet that I modified to use historical data, but also apply historical capital gains rates to each years' rebalancing operations as well. You could also adjust the rate for various scenarios (such as no taxes, or draconian). The average long term rate historically has been around 25% just for reference.
Then I also rolled in the historical tax cost analysis data from Morningstar for each class of asset. So for instance a broad based index fund had a low tax cost, but small cap value was off the charts giving up around 1-2% a year of the final returns on average to taxes.
When I looked at portfolios, the ones that were sliced and diced to death and used tax-inefficient funds had basically no edge over the simpler portfolios (like the Permanent Portfolio). In fact, if you take taxes above the historic norm of 25% on LT gains, you could end up being well below the simpler portfolio.
In essence, investors that took lots of risk on value strategies could very well be handing the excess profits off to Uncle Sam. So they take the risk, but get no reward.
A lot of this is going to be very dependent on each person. But the exercise was useful because it shows that investors can't control the market, but they can control for taxes. All things being equal:
1) Choose the broadest based funds with lowest tax costs.
2) Don't rebalance more than you have to.
3) Don't tinker.
I have not updated the spreadsheet in many years and won't release it (I don't want to do technical support). But if you want to build your own you can use the historical tax data here:
http://www.taxpolicycenter.org/taxfacts ... ?Docid=161
Then go to Morningstar and pick some index funds that have been around for at least 10 years to smooth out the tax impacts. Then apply their after-tax cost load to the results as well.
I would like to see this incorporated into Simba's spreadsheet. I think it would show a lot of people that complicated portfolios, even if indexed, are not really a great idea when taxes are involved.
Then I also rolled in the historical tax cost analysis data from Morningstar for each class of asset. So for instance a broad based index fund had a low tax cost, but small cap value was off the charts giving up around 1-2% a year of the final returns on average to taxes.
When I looked at portfolios, the ones that were sliced and diced to death and used tax-inefficient funds had basically no edge over the simpler portfolios (like the Permanent Portfolio). In fact, if you take taxes above the historic norm of 25% on LT gains, you could end up being well below the simpler portfolio.
In essence, investors that took lots of risk on value strategies could very well be handing the excess profits off to Uncle Sam. So they take the risk, but get no reward.
A lot of this is going to be very dependent on each person. But the exercise was useful because it shows that investors can't control the market, but they can control for taxes. All things being equal:
1) Choose the broadest based funds with lowest tax costs.
2) Don't rebalance more than you have to.
3) Don't tinker.
I have not updated the spreadsheet in many years and won't release it (I don't want to do technical support). But if you want to build your own you can use the historical tax data here:
http://www.taxpolicycenter.org/taxfacts ... ?Docid=161
Then go to Morningstar and pick some index funds that have been around for at least 10 years to smooth out the tax impacts. Then apply their after-tax cost load to the results as well.
I would like to see this incorporated into Simba's spreadsheet. I think it would show a lot of people that complicated portfolios, even if indexed, are not really a great idea when taxes are involved.
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MachineGhost
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Re: Historical returns including tax
That's correct, sir!rickb wrote: Are you saying that if you include transaction costs Faber is simply incorrect in his assertion, per http://papers.ssrn.com/sol3/papers.cfm? ... _id=962461, that adding 10 month MA timing to nearly anything reduces risk and improves returns? Are there sources you can point to for this opinion?
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Historical returns including tax
Actually, it will improve the returns for the IRS quite a bit.MachineGhost wrote:That's correct, sir!rickb wrote: Are you saying that if you include transaction costs Faber is simply incorrect in his assertion, per http://papers.ssrn.com/sol3/papers.cfm? ... _id=962461, that adding 10 month MA timing to nearly anything reduces risk and improves returns? Are there sources you can point to for this opinion?
Re: Historical returns including tax
And the sources are what, specifically?MachineGhost wrote:That's correct, sir!rickb wrote: Are you saying that if you include transaction costs Faber is simply incorrect in his assertion, per http://papers.ssrn.com/sol3/papers.cfm? ... _id=962461, that adding 10 month MA timing to nearly anything reduces risk and improves returns? Are there sources you can point to for this opinion?
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MachineGhost
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Re: Historical returns including tax
Use Google? I don't remember every reference for everything I store in my head. I don't mean to be snarky, but I'm not Gumby who can literally quote anything for proof.rickb wrote: And the sources are what, specifically?
You could easily backtest the system and add in transaction costs to see. Commissions were fixed until May Day and theres a few academic papers on what historical transaction costs were.
Last edited by MachineGhost on Mon Feb 25, 2013 10:12 am, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Historical returns including tax
I don't either. So I switched from Thorazine to Haldol and it has helped a ton.MachineGhost wrote: I don't remember every reference for everything I store in my head.
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MachineGhost
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- Joined: Sat Nov 12, 2011 9:31 am
Re: Historical returns including tax
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[/align]"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Historical returns including tax
Sheesh, if i owned a hedge fund, I would condition my "performance fees" on performance above the index, net all other costs and fees. If you don't beat the index on a take-home basis, you haven't performed.
Re: Historical returns including tax
... take full advantage of the opportunity to "help" all those "accredited" investors so desperate to give me their money!dragoncar wrote: if i owned a hedge fund, I would ...