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Andrew -- your post has a key point that I'd like to clarify. Let's
say someone has a loss-carryforward from a "prevous life".
Now if that person starts down the buy-and-hold path, that
loss-carryforward may not be used for quite a while. However, if they
go down the trading path and make a success of it, then at least they
have on the horizon, a point where the loss-carryforwards have been
eaten up by trading profits, at which time they can reevaluate
byuy-and-hold versus trading. Make sense?
--- In equismetastock@xxxxxxxxxxxxxxx, "Andrew Tomlinson"
<andrew_tomlinson@xxxx> wrote:
>
> This is a great post, and reinforces some conclusions I had been
coming to
> for my own activities. Tax management is a key issue in trader/investor
> profitability. The two additional thoughts (for a US trader)that come up
> are:
> - consider restricting short term trading activities to tax-deferred
> accounts, such as IRAs
> - consider shifting trading activity to the futures markets. Futures
gains
> are treated under Section 1256 as 60% long term and 40% short term. And
> record keeping is much easier as you don't have to keep track of basis
> - compare trading and backtesting results on an after-tax basis.
i.e. if you
> have a trading strategy you want to compare to buy and hold, then
consider
> your results after applying short term capital gains taxes to the
trading
> strategy and lower long term capital gains rates to the buy and
hold. Your
> short-term return needs to be 30% higher or more (depending on the exact
> rates you use) to be at after-tax breakeven.
>
> Of course, most traders lose money in the first few years, so you
can build
> up a nice loss-carryforward to shelter your gains (if and when you
start to
> make them) for a few more years. So you have to have been profitable
for a
> while before you care - maybe that's why we don't hear much about tax
> strategies for traders!
>
> Best
> Andrew
>
>
>
>
>
> -----Original Message-----
> From: equismetastock@xxxxxxxxxxxxxxx
[mailto:equismetastock@xxxxxxxxxxxxxxx]
> On Behalf Of superfragalist
> Sent: Monday, June 27, 2005 12:55 AM
> To: equismetastock@xxxxxxxxxxxxxxx
> Subject: [EquisMetaStock Group] Re: William Bernstein
>
>
> Andy,
>
> Here are the results from Bernstein's buy and hold asset allocation
methods
> based on my implementation of them.
>
> 1998 -7.86
> 1999 27.73
> 2000 3.30
> 2001 2.83
> 2002 1.76
> 2003 49.95
> 2004 23.76
> YTD 4.35
>
> The statement I made was if I had used Bernstein's approach, I would
have
> been nearly as well off money wise as I have been trading.
>
> Your question implies do I do better than the numbers above from
trading.
> Yes, considerably better. However, when you consider that the
numbers I've
> given you are nearly all capital gains, the issue becomes taxes and
> expenses.
>
> If you consider Federal and State Tax on my trading profits, I pay
nearly
> 50% of my earnings to the government. Then there is the issue of
> expenses--data, professional fees for accountants and attorneys,
educational
> materials, equipment and software.
>
> There is no social security tax, nor can I deduct expenses because I
don't
> file as a trading business. I can't contribute to a defined benefits
plan or
> SEP or 401K. I could set up a Sub S and trade from that but it triggers
> automatic detailed audits when it's a trading company, which I don't
much
> like based on the others I have had to put up with.
>
> When I draw money out of a buy and hold account, I don't pay tax on
the full
> amount. I only pay tax on the difference between my cost basis and
the gain.
> On the gain I only pay 15%. So I don't need to draw out as much to
have the
> same after tax income. When you figure it all out, my taxes would be
very
> small on draws from the buy and hold accounts.
>
> None of this includes time, hours and hours of time. What's that
worth? Over
> the last five years, I've put more hours into my trading than I did
when I
> was working full time. My previous job was very demanding, trading
demands
> more.
>
> When I take all of the factors into consideration, for me, I can't give
> trading an overwhelming endorsement even though I actually make
money from
> it.
>
> Before I started trading full time, I worked the problem backwards.
In other
> words I estimated what I would make from buy and hold and then what
I would
> have to make from trading to beat that including the taxes,
expenses, etc. I
> missed the time estimate.
>
> So far my financial models have been within the expected tolerances, but
> each year when I evaluate the comparable worth including the
intangibles,
> it's a hard question to answer in hindsight between which method
would have
> been better.
>
> One of the issues for someone who has to make a living from a buy
and hold
> asset allocation model is the performance of the model during the first
> three years. The first three years generally determine how
successful the
> method will be over the long run.
>
> For example, if I had started the Bernstein method with a
combination of a
> couple of losing years and then a strong year and then a couple of
> profitable but low return years, the Bernstein method would not
compare as
> favorably to trading as it does. Not only is there drawdown from losing
> money, there is additional drawdown from living expenses. That extra
> drawdown makes it harder to recover in the good years. You can
easily see
> this with Monte Carlo simulation, which I have run on a number of asset
> allocation models.
>
> For anyone who is not trying to make a living off of a portfolio,
then the
> starting point is not nearly so important. In that case, I almost always
> recommend the asset allocation model instead of trading.
>
> For those who want to have some fun trading or swinging for home runs or
> whatever, I suggest they put 90% of their assets into the model and only
> trade with 10%.
>
> As I mentioned in the other articles, there have been other benefits to
> trading outside of the money. However, in reviewing the last five years,
> it's a tough choice--at least for me.
>
> Everybody has their reasons for whatever they do. I don't mind
sharing my
> reasoning if it helps someone else make an informed decision.
>
>
>
>
>
>
>
> --- In equismetastock@xxxxxxxxxxxxxxx, "metastkuser"
<andysmith_999@xxxx>
> wrote:
> > Super. If I recall correctly, you said in a prior post that had you
> > used Bernstein's approach, your trading results over the last few
> > years would be no worse than they are now? Surely that can't be right.
>
>
>
>
>
>
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