Obviously capital gains taxes are a non-issue in that case. Nevertheless, market timing is an inferior strategy to buy and hold, and the assumption of perfect timing is silly.
Here is real-life buy and hold story. I bought TYC in the early summer of 1987 (great timing: about 3 months before the crash) at a split adjusted cost of approximately $6. Today it is selling for around $75. If you care to work out the growth, that amounts to about 23.7% per annum, plus approximately 1% per annum (average) for a dividend. So I end up with 24.7% per annum compounded (pre-tax). Unfortunately, the company merged to form an offshore company a year and a half ago, so I needed to pay capital gains taxes after approximately a 10 year hold. At that time the stock was around $46, so my pre-tax yield was 22.6% plus of course the dividend, bringing it up to about 23.6%. Neglecting the dividend for the moment, The taxes I paid were approximately $11.20 per share which reduced my annualized after-tax yield to 19.2% (neglecting dividends). But assuming that a timer had the same result, his after-tax yield (neglecting dividends) would be only 16.27% -- almost 3% lower than mine! The reason is that the timer pays taxes annually, while I get to invest those deferred taxes. In order for the timer to equal my after-tax result, he would have to generate 24.62% pre-tax while I generated 22.6%!
Now that we have a differential between short-term and long-term capital gains taxes the differences are even greater.
TTFN,
CTC
TTFN,
CTC |
