Estimate of the Impact of Taxes
Warning: We do not have expertise in tax matters. All viewers of this information, including prospective and existing clients should use it as a starting point for consultations with their professional tax advisor. Please see Disclaimer.
Unfortunately, many technicians/financial professions do not quantify the impact of taxes and transaction costs in their models or their investment results. We fastidiously quantified the impacts of both in our comparisons between our strategies and Buy & Hold. Transaction costs, including commissions and slippage were estimated and built into all of our models. Our stated return rates include transaction costs (more on transactions costs).
We estimated the impact of taxes on our annualized return rates by determining the percentage of transactions subject to short-term and long-term capital gains and then assumed our investors would be subject to the highest tax brackets (highest Federal bracket, including the Obamacare capital gains investment tax and the highest California tax bracket). To determine the incremental taxes paid between our strategies and a Buy & Hold strategy, we assumed that the Buy & Hold investor would have to sell her/his holdings at the end of 25 years (more on taxes).
Our best estimates for the incremental annual tax impact on our strategies are as follows:
You should subtract the annual tax rates above from the annualized returns of each of our strategies to make a fair, apples-to-apples comparison to Buy & Hold returns. All of our strategies, even before being risk-adjusted, have returns that exceed their benchmarks by more that the tax impact on returns shown above: in the case of our momentum strategies, by significantly more.
Of course, for tax-deferred accounts, like traditional IRAs or SEPs or tax-free accounts, like Roth IRAs, the tax implications associated with our strategies are by and large not significant compared to Buy & Hold.