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In this chapter we share the after-tax return of the S&P 500 since its inception. The annualized, after-tax return for a high net worth investor who began investing in 1957 and who liquidated her portfolio on December 31, 2017, was 7.36%. The model also took into account the impact of state taxation. The main objective of the chapter was not only to calculate the after-tax return on equities, but also to compare stock and bond returns on a net basis. Thus, we were trying to observe the after-tax equity risk premium (or lack of risk premium) that was available to investors throughout the period. We supposed (when we began the study) that there were times when bonds outperformed equities on a net basis. That supposition turned out to be correct.
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The term “stocks for the long run” was coined by Jeremy J. Siegel and is the title of his book Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, which was originally published in 1994 and is currently in its fifth edition, McGraw-Hill Education, 2014.
Standard & Poor’s Web site www.standardandpoors.com contains the history of the Index, which dates to 1923. It was expanded to include 500 companies in 1957.
Ten-year rolling returns studied 1957–1967, 1958–1968, and so on. Twenty-year rolling returns studied 1957–1977, 1958–1978, and so on.
For rolling 10- and 20-year periods, we used the lower of “annual return” or “post liquidation.”
- Portfolio Optimization: The Impact of Taxation, Turnover, and Time Horizon on Net Returns
Niall J. Gannon
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