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Forbes
15-04-2025
- Business
- Forbes
When Buy-And-Hold Becomes A Retirement-Sapping Taxable Event
TOPSHOT - The dome of the US Capitol is seen at dusk in Washington, DC on November 13, 2023. (Photo ... More by Mandel NGAN / AFP) (Photo by MANDEL NGAN/AFP via Getty Images) While there's no evidence that Albert Einstein uttered the quip long associated with him about compound returns as the '8th Wonder of the World,' it's not unreasonable to imagine the genius wit saying something just like that. When it comes to savings, compounding has wondrous qualities that become magical over time. That's why the patient investor can combine prudence with time to become a well-to-do retiree. As investor Barry Ritholtz pointed out in his recently released book How Not To Invest, compounding easily papers over a multitude of investment errors, including a propensity to buy at the top of every market. What Ritholtz found via empirical study is that over long stretches of time, the returns enjoyed by the investor prone to buy just ahead of market declines and corrections does almost as well as the proverbial unicorn who routinely buys at market lows. Such is the genius of buying and holding through market downs and ups. These truths rate prominent thought in consideration of how capital gains achieved by mutual funds are presently taxed. While the funds themselves don't pay taxes on gains realized through sales, the individual investors in their funds do. That's the why behind the title of this opinion piece. Even when mutual fund investors intend to hold their shares in the fund for the long-term, they pay annual capital gains taxes as though they're actively trading. Explained more plainly, gains realized by the fund managers are paid for in taxes by the smaller, frequently retail investors in the fund. Stop and think about this. On its face, the tax shifting that this enables exists as a penalty placed on small investors who wisely outsource their stock-picking to others. Outsourcing is crucial precisely because investing is best left to the experts. To invest for oneself is like cutting one's own hair. At the same time, what are investors supposed to do when doing the right thing comes at a cost? Compounding once again reveals magical qualities when matched with time, but if the returns are going to be compromised by taxable event-style trading that is paid for by the retail investor, then the incentive is to still buy and hold, albeit in cutting one's own hair fashion. Thankfully there's a potential fix working its way through Congress. Reps. Beth Van Duyne (R-TX) and Terri Sewell (D-AL) have introduced the Generating Retirement Ownership Through Long-Term Holding (GROWTH) Act to correct what saps the genius of patient, buy-and-hold retirement saving. The GROWTH Act will spare buy-and-hold mutual fund investors annual taxes run up by fund managers, and will instead defer the taxation on realized gains to when the retail investor ultimately sells the shares in the fund. So, while there shouldn't be taxation of any kind on capital gains, the GROWTH Act at the very least corrects a retirement-sapping injustice that neuters the genius of compounding through annual taxation gains realized by fund managers, as opposed to fund shareholders. Enormous effort goes into planning for and saving for retirement. What a mistake to penalize prudence with a tax levied on retirement savers acting with extraordinary prudence. Let's erase a very real bug in the tax code that so substantially chips away at the genius of patient, long-term retirement saving.
Yahoo
30-03-2025
- Business
- Yahoo
How investors can trick their 'big dumb lizard brain'
A version of this post first appeared on Something I love about Barry Ritholtz's writing is how he often surprises you with unexpected insights. Sure, he advances well-known — but still underappreciated — wisdom like how index fund investing is hard to beat and why making short-term market forecasts is futile. But he offers much more than that. Take this excerpt on psychology from his new book, "How Not To Invest," which he shared in a recent piece for Bloomberg:Nobel laureate Paul Samuelson once said, "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." While the dopamine hit that comes from a risky stock bet paying off may be enjoyable, passive management is the better option for most investors looking to grow long-term wealth. The catch is that you must take steps to protect yourself from, well, yourself. To do so, set up a "mad-money account" — or a cowboy account, as it's sometimes called. Add less than 5% of your liquid capital, so maybe $5,000 if you're liquid enough to have $100,000 as a safety net. Now you can indulge your inner hedge fund manager without jeopardizing anything too material. If it works out, you're more likely to let those winners run because it's for fun and not your real money. If it's a debacle, appreciate the terrific lesson that should remind you that this is not your forte. In his book, Barry shares a little more on what he personally does: In my cowboy account, using 2% of my liquid net worth, I play the dumbest game possible: Market timing with out-of-the-money stock option calls… He discusses specific trades he's made. I'll let you buy the book if you really want the details. Here's his bottom line. Regardless of the results, it allows my inner junkie to leave my main portfolio alone. That is the true value of the cowboy account — my real money remains unmolested by me and my big dumb lizard brain. Like most of us, Barry is not a machine. He is a human with a brain. And when your brain is mismanaged, it can be your worst enemy. The idea of having a "cowboy account" is not without its issues. Some of you might say it could be a slippery slope towards costlier risk taking. This advice certainly isn't for everybody. But let's also not pretend like living in denial of your instincts and biases isn't risky either. As TKer subscribers know, my investing mostly consists of buying and holding passively managed index funds. But while I may have lost my taste for picking stocks and timing the market a long time ago, I haven't lost my appetite for risk. Personally, I've taken Samuelson's advice much more literally. Occasionally, I like to play craps live in a casino. That's the game where you often hear crowds of people cheer loudly as they engage in the mania of a "hot" table. I won't get into too much detail, but it's a game where I can lose enough that it's memorably painful but not so much that it's material to my finances. Importantly, it satiates my risk appetite, and it gives me renewed appreciation for my financial plan at relatively low cost. In some ways, investing is like dieting: For many people, attempting to cut out junk food entirely just doesn't work. If you want to learn more about how real people can better navigate the treacherous world of investing, buy Barry's book. He's got real world solutions for your real world challenges. Read more: Barry Ritholtz explains how not to make stupid investing mistakes I was shocked and humbled to learn that Barry mentioned me in "How NOT To Invest." I've been reading his blogs since before the financial crisis. He's had a huge impact on how I think and write about markets. If you like TKer, then you'll love Barry's writing. Catch up on his views by reading his book! I was on podcast on Thursday with Andrew Beer of Dynamic Beta Investments, the legendary Josh Brown, and the brilliant Michael Batnick. We covered a lot. Trump trade policy, stock market sentiment, credit, hedge funds, diversification, and more! Listen on Apple Podcasts, Spotify, YouTube, and beyond! There were several notable data points and macroeconomic developments since our last review: 🛍️ Consumer spending ticks up. According to BEA data, personal consumption expenditures increased 0.4% month over month in February to an annual rate of $20.4 trillion. (Source: BEA via FRED) Adjusted for inflation, real personal consumption expenditures increased by 0.1%. (Source: BEA via FRED) For more on consumer spending, read: 🛍️ and 📉 🎈 Inflation heats up. The personal consumption expenditures (PCE) price index in February was up 2.5% from a year ago. The core PCE price index — the Federal Reserve's preferred measure of inflation — was up 2.8% during the month, up from January's 2.7% rate. While it's above the Fed's 2% target, it remains near its lowest level since March 2021. (Source: BEA via FRED) On a month over month basis, the core PCE price index was up 0.38%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 3.5% and 3.1%, respectively. (Source: Nick Timiraos) The recent uptick in inflation rates is an unwelcome development, especially as other economic trend cool. For more on inflation and the outlook for monetary policy, read: ✂️ and 🧐 💼 Unemployment claims tick lower. Initial claims for unemployment benefits declined to 224,000 during the week ending March 22, down from 225,000 the week prior. This metric continues to be at levels historically associated with economic growth. (Source: DoL via FRED) For more context, read: 🏛️ and 💼 👎 Consumer vibes deteriorate. From the University of Michigan's March Surveys of Consumers: "Consumer sentiment confirmed its early month reading and fell for the third straight month, plummeting 12% from February. The expectations index plunged a precipitous 18% and has now lost more than 30% since November 2024. This month's decline reflects a clear consensus across all demographic and political affiliations; Republicans joined independents and Democrats in expressing worsening expectations since February for their personal finances, business conditions, unemployment, and inflation. Consumers continue to worry about the potential for pain amid ongoing economic policy developments. Notably, two-thirds of consumers expect unemployment to rise in the year ahead, the highest reading since 2009. This trend reveals a key vulnerability for consumers, given that strong labor markets and incomes have been the primary source of strength supporting consumer spending in recent years." The Conference Board's Consumer Confidence Index ticked lower in March. From the firm's Stephanie Guichard: "Of the Index's five components, only consumers' assessment of present labor market conditions improved, albeit slightly. Views of current business conditions weakened to close to neutral. Consumers' expectations were especially gloomy, with pessimism about future business conditions deepening and confidence about future employment prospects falling to a 12-year low. Meanwhile, consumers' optimism about future income—which had held up quite strongly in the past few months—largely vanished, suggesting worries about the economy and labor market have started to spread into consumers' assessments of their personal situations." Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: 🙊 and 🛫 👍 Consumers feel a little better about the labor market. From The Conference Board's March Consumer Confidence survey: "Consumers' views of the labor market improved slightly in March. 33.6% of consumers said jobs were 'plentiful,' unchanged from February. 15.7% of consumers said jobs were 'hard to get,' down from 16.0%." Many economists monitor the spread between these two percentages (a.k.a., the labor market differential), and it's generally been reflecting a cooling labor market. (Source: Nick Timiraos) For more on the labor market, read: 💼 💳 Card spending data is holding up. From JPMorgan: "As of 18 Mar 2025, our Chase Consumer Card spending data (unadjusted) was 1.8% above the same day last year. Based on the Chase Consumer Card data through 18 Mar 2025, our estimate of the US Census March control measure of retail sales m/m is 0.46%." (Source: JPMorgan) From BofA: "Total card spending per HH was up 1.5% y/y in the week ending Mar 22, according to BAC aggregated credit & debit card data. Entertainment spending growth has been weak since late Feb. The recent partial recovery has been led by the Midwest & South. Total card spending growth in the DC area remains weaker than the rest of the country, likely due to the impact of DOGE cuts." (Source: BofA) For more on the consumer, read: 🛍️ ⛽️ Gas prices tick higher. From AAA: "With Spring Break in full swing, drivers are paying more at the pump compared to last week. The national average for a gallon of gas went up 3 cents since last Thursday to $3.15. Gas prices typically start going up this time of year and peak during summer. But the national average is still about 40 cents lower than last year, due to tepid gasoline demand and weak crude oil prices. " (Source: AAA) For more on energy prices, read: 🛢️ 🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.65% from 6.67% last week. From Freddie Mac: "The 30-year fixed-rate mortgage ticked down by two basis points this week. Recent mortgage rate stability continues to benefit potential buyers this spring, as reflected in the uptick in purchase applications." There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million (or nearly 40%) of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates. For more on mortgages and home prices, read: 😖 🏠 Home prices rise. According to the S&P CoreLogic Case-Shiller index, home prices rose 0.6% month-over-month in January. From S&P Dow Jones Indices' Nicholas Godec: "Rising mortgage rates throughout the year elevated monthly payment burdens, which, combined with already high home prices, pushed affordability to multi-decade lows in many regions. This likely contributed to subdued activity in the back half of the year, with both buyers and sellers exercising caution. Inventory constraints also remain a challenge, particularly in legacy metro areas, where limited new construction continues to restrict supply." 🏘️ New home sales rise. Sales of newly built homes increased 1.8% in February to an annualized rate of 676,000 units. (Source: Census) 🏢 Offices remain relatively empty. From Kastle Systems: "Peak day office occupancy was 63.1% on Tuesday last week, up two tenths of a point from the previous week. In Austin, the South by Southwest conference and festival led to lower daily occupancy nearly every day. And in Houston, CERAWeek 2025 resulted in significantly lower occupancy last Thursday and Friday before rebounding after the conference, peaking at 71.2% on Tuesday. The 10-city average low was on Friday at 34.3%, down 2.1 points from last week." (Source: Kastle) For more on office occupancy, read: 🏢 🏭 Business investment activity ticks lower. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — declined 0.3% to $74.99 billion in February. (Source: Census via FRED) Core capex orders are a leading indicator, meaning they foretell economic activity down the road. The growth rate had leveled off a bit, but they've perked up in recent months. For more on core capex, read: ↯ and 📉 👍 Activity survey signals growth. From S&P Global's March Flash U.S. PMI: "A welcome upturn in service sector activity in March has helped propel stronger economic growth at the end of the first quarter. However, the survey data are indicative of the economy growing at an annualized 1.9% rate in March and just 1.5% over the quarter as a whole, pointing to a slowing of GDP growth compared to the end of 2024. Near-term risks also seem tilted to the downside. Growth is concentrated in the service sector as manufacturing fell back into decline after the frontrunning of tariffs had temporarily boosted factory output in the first two months of the year. Similarly, some of the March upturn in services was reportedly due to business picking up after adverse weather conditions had dampened activity across many states in January and February, which could prove a temporary bounce." (Source: S&P Global) At the same time inflationary pressures appear to be building. From the report: "A key concern over tariffs is the impact on inflation, with the March survey indicating a further sharp rise in costs as suppliers pass tariff-related price hikes on to US companies. Firms' costs are now rising at the steepest rate for nearly two years, with factories increasingly passing these higher costs onto customers. Thankfully, from the Federal Reserve's perspective, services inflation remains relatively subdued, but this reflects the need to keep prices low amid weak demand, which will harm profits." (Source: S&P Global) Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data. For more on this, read: 🙊 📉 Near-term GDP growth estimates are tracking negative. The Atlanta Fed's GDPNow model sees real GDP growth declining at a 2.8% rate in Q1. Adjusted for the impact of gold imports and exports, they see GDP falling at a 0.5% rate. (Source: Atlanta Fed) For more on the economy, read: 📉 Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices. Demand is positive: Demand for goods and services remains positive, supported by strong consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market. But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less "coiled" these days as major tailwinds like excess job openings have faded. It has become harder to argue that growth is destiny. Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor's perspective, what matters is that the hard economic data continues to hold up. Stocks look better than the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth. Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets. Investing is never a smooth ride: There's also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened. Think long term: For now, there's no reason to believe there'll be a challenge that the economy and the markets won't be able to overcome over time. The long game remains undefeated, and it's a streak long-term investors can expect to continue. A version of this post first appeared on Sign in to access your portfolio
