A few thoughts on taxes...
1. Current tax rates are at an historic low
Capital gains taxes are about half what they were in 1980 and dividend tax rates are about a fifth of what they were in 1980 (according to the table below from Swensen’s book). Looks like the future direction of tax rates may be up.
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Historical Federal Tax Rates
LT capital ST capital gains
gains rate and current income Dividends
1980 28.0 70.0 70.0
1990 28.0 31.0 31.0
2000 20.0 39.6 39.6
2003 15.0 35.0 15.0
Source: Swensen’s Unconventional Success
If we take funds with long track records (some often discussed on the forum) tax efficiency looks much worse than recent tax cost ratios suggest. For the first three funds in the table below (assuming Vanguard’s numbers are right) from the 1930s to end 2007 taxes would have eroded over 90% of portfolio value (i.e the after tax portfolio value at end 2007 would have been about one tenth the value of the portfolio had it not been taxed). For the last two funds in the table with shorter histories (from 50s and 60s to end 2007), taxes would have eroded 60-70% of portfolio value.
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Annualized Returns Indicative* Ratio
To 03/31/08 $1 Growth After/Pre-tax
FUND INCEPTION Pre-tax After-Tax Pre-Tax After-Tax End Value
CGM Mutual (LOMMX) 11/06/29 9.06 5.81 867 82 0.09
Fidelity (FFIDX) 04/30/30 10.33 6.69 2138 156 0.07
AF Inv. Co. America (AIVSX) 01/02/34 12.53 9.15 6221 651 0.10
T.Rowe Price Growth (PRGFX) 04/11/50 10.81 8.55 385 117 0.30
Dodge and Cox Stock (DODGX) 01/04/65 11.69 9.37 116 47 0.41
Source: Pre and post tax returns from Vanguard.
*Indicative estimates using the funds inception dates as the start or end of year when they started – which ever was closer.
IMO (and as the above illustrates) tax sensitive investing can yield significant returns (or rather reduce significant losses).
In this respect this may be useful: How to be a tax-savvy investor
FWIW – here are some TM funds which I like:
- Vanguard Tax-Managed Capital Appreciation
Vanguard Tax-Managed Small Cap
Vanguard Tax-Managed International
- DFA Tax-Managed US Marketwide Value
DFA Tax-Managed US Targeted Value
DFA Tax-Managed International Value
- Bridgeway Ultra-Small Company Market
Two articles I found useful on ETFs and taxes which may be useful to others... Robert
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