Douglas Johnson wrote:
- quote -

This works with positive returns because losses can often be written off
at a higher tax rate than gains are taxed at. For example, let's assume
that you're in the 28% tax bracket. I'll steal part of Rich's example
for this:

Jan. 2, Year 1:
Buy 10,000 shares of XYZ [at] $10
Buy 10,000 shares of ABC [at] $10

Dec 30, Year 1:
ABC now at $9.70. Sell ABC for $3,000 loss.
XYZ now at $10.50. Keep holding.
Deduct $3000 from Year 1 taxes giving an $840 tax credit.

Jan 3, Year 2:
XYZ now at $10.50. Sell XYZ for a $5000 gain.
Pay long term capital gains of $750 on the gain.

Over the year you have paid a net -$90 in taxes while receiving a $2000
net gain.

Douglas Johnson <johnson[at]classtech.NOTPARTOFADDRESS.com> writes:

- quote -

No, it doesn't, because you're not taxed on winners
unil you sell.

Simple, if contrived example:
Day 1:
Buy 10,000sh XYZ [at] $10
Buy 10,000sh ABC [at] $10

Year 2:
ABC now at $9. Sell 1000sh for $1,000 loss.
XYZ now at $14. Keep holding.

Year 5:
ABC now at $8. Sell 1000sh for a $2,000 loss.
XYZ now at $20. Keep holding.

Overall you have a solidly positive investment return
but negative net taxes paid.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

- quote -

I am real confused. How can you make money by losing money? Certainly careful
selling of losing assets can reduce taxes on gaining assets. But "negative net
taxes over the long run" means negative investment returns over the long run.
This is *not* a good thing. -- Doug

beliavsky[at]aol.com wrote:

- quote -

I find myself in this very situation. I'm an aggressive tax loss
harvester and through 2003 I have paid net negative taxes on my gains in
my taxable accounts (I haven't done my taxes for 2004 yet, but I suspect
that I'll probably just cross the line into net positive taxes). But
I'm guessing that this isn't sustainable as my portfolio grows because
of the $3000 income loss limit. I'd be interested to see the results of
your simulation (and I'd like to look at your source code, too!). I
hope you'll post your findings.

-Will

HW "Skip" Weldon wrote:
- quote -

Cheer up, Skip . As you know, investors now have access to low-cost
index funds (I think they were started in the 1970s). Today's Wall
Street Journal has a full-page ad from Fidelity on page A5 announcing
that is permanently reducing the expense ratios on its S&P 500,
Wilshire 4500, and Wilshire 5000 index funds to 0.10% annually, about
50% lower than the fees of Vanguard.

I think an investor with a substantial stock portfolio (say $200 K or
more) can pay low or even negative net taxes over the long run if he
purchases individual stocks or perhaps a diversified portfolio of
sector ETFs and systematically practices tax loss harvesting, taking
losses at least annually on stocks that have fallen and offsetting up
to $3000 of ordinary income, while realizing only gains that are taxed
at the 15% rate. But I need to do a computer simulation (in Fortran )
to verify this. One can Google "tax loss harvesting" to find research
on the subject.

On Wed, 2 Mar 2005 11:49:33 CST, beliavsky[at]aol.com wrote:

- quote -

And then, after you reduce the historic long-term market return by
inflation, do the same with taxes and investment costs. Downright
depressing, actually - and that assumes it all works out.

All of this gives meaning to the old addage: "Financial security has
more to do with how much you save, rather than where you save."


-HW "Skip" Weldon
Columbia, SC

<beliavsky[at]aol.com> wrote in message
news:1109785670.860163.185300[at]g14g2000cwa.googlegroups.com...

- quote -

So, this isn't really low returns afterall. These returns are net of
inflation. I don't think anybody is really projecting stock market returns
in the 13+% range. They just use 10% because that's historical average, and
don't factor in inflation.

Elizabeth Richardson

I think this begs a few questions. First and foremost, what one "projects"
one will need to live in retirement assumes a certain inflation rate.

IOW, we roll the dice using the best guidance available, IMO.

"Andy" <idontcheckthismailbox[at]yahoo.com> wrote
- quote -

Douglas Johnson wrote:
- quote -

Good points. The labor prices that boomer retirees are going to face
are going to be a function of how much purchasing power (retirement
savings + social security) the whole boomer generation has in
retirement. If everyone saves aggressively for retirement then
everyone will have a lot of money in retirement, and the price of labor
intensive services for seniors will be bid up to higher levels, wiping
out much of the benefit of all the retirement saving everyone did. If
almost no one saves much for retirement, then labor prices will not get
bid up so much and the few people who did save a lot for retirement
will have a much nicer retirement than their peers because they will be
able to afford the premium necessary to hire from the limited pool of
working age people.

Given this dynamic, which renders projections of future living expenses
extremely unreliable, my financial planning strategy is simple: save a
much higher percentage of my income than everyone else my age. Its
like the old joke: I don't have to outrun the bear, I just have to
outrun the other guy. I don't project what income I will need in
retirement, or what the expected rates of return will be on my
investments, or what age I expect to retire. I just save a lot more
than most everyone else my age.

Andy

Paul Michael Brown wrote:
- quote -

44 years. Here is the context from the article:

"Social Security officials' forecasts for the long-term returns on
stocks and bonds make a desirable outcome look highly likely. The
program's actuaries predict that over the period of a typical
American's career, or 44 years, stocks would return an average of 6.5%,
corporate bonds 3.5% and government bonds 3%, all in "real" terms --
that is, after inflation."

- quote -

I don't see a definition in the article, but I think the buyback yield
is the ratio of

the amount of cash companies use to buy back stock

to

their market capitalization .

The reason for including buyback yield is that total returns from
stocks should not depend on the method (dividend payments or buybacks)
companies use to disburse cash to investors.

Elle wrote:

- quote -

Some people casually assume a 10% rate of return on equities when they
are figuring out how much money they should be saving from each
paycheck in order to have net worth of X dollars when they retire. If
the true rate of return turns out to be much less than 10% then they
are going to have a lot less money at retirement than they were hoping.

I think that this article should motivate people to run their numbers
using these low rate of return projections and see if they are happy
with their projected retirement savings assuming these rate-of-return
figures. If they don't like what they see they should consider saving
more now.

Andy

[Re WSJ article on "long term" returns for various asset classes going forward.]

What time horizon did the forecasters define as "long term?"

- quote -

Please define "buyback yield."

"Elle" <elle_navorski[at]nospamearthlink.net> wrote:

- quote -

My take on it is that it is going to be stock picker's market, much like the
70's. There will be good money to be made, but it will be made by investing in
individual stocks, not indices.

- quote -

I think this is wishful thinking. I don't see any correlation between
investment returns and the cost of how one *wants* to live in retirement. I do
see the obvious correlation between investment returns and how one *will* live
in retirement.

There is a lot of talk about Social Security and how in year 20xx there will be
x workers paying taxes for every retiree. What gets missed is that there will
also be x workers working to provide goods and services to every retiree.

This has several implications, but the one that is relevant to this discussion
is that the cost of that labor will probably increase as the relative demand
increases. Immigration, off-shoring, and imports will all help to mitigate the
problem. But baby boomers can expect to pay more for labor intensive services
such as housing, education, and heath care.

-- Doug

Lon Casino wrote:
- quote -


Much retirement money is in IRAs or 401(k)'s, where the tax treatment
of stocks, bonds, and REITs are the same. There are low cost index
funds for both stocks and bonds (although "low cost" needs to be
defined carefully, as my previous post on Russell 2000 index funds
explains).

I think one has to decide on an asset allocation that they are
comfortable with and stick with it. I think it is pointless to try to
judge where the market is going to go.

That's my opinion.

JLP

http://AllThingsFinancial.blogspot.com

I guess a reasonable question is why would anyone put their money in a
fund when they could almost as well in govt. bonds with NO downside
(risk). The expense of funds say 3/4% plus state tates makes me wonder.

beliavsky[at]aol.com wrote:

- quote -

Beliavsky,

This is real interesting. I'm going to the library soon to read the whole
article.

To the group: What do people think are some fair interpretations of this
expected lower rate of return of stocks and bonds, as far as financial
planning for retirement is concerned?

If this expected lower rate of return occurs, then I'm inclined to think it
really shouldn't have much of an effect on retirement planning, since the
cost of the "way one wants to live in retirement" should correlate to the
stock and bond markets and inflation. I think... So I'm wondering if this
data deserves nothing more than a shrug; maybe a caution to investigate
international stocks; maybe some re-consideration of portfolio allocation
between stocks and bonds, based on the spread below vs. what is historic.

snip article summary from Feb. 28, 2005 Wall Street Journal, page C1, on
long term predicted returns of stock market and bonds.

beliavsky[at]aol.com wrote:
- quote -

A few weeks ago I read some article where they pointed out that a large
part of the historical rate of return on stocks includes a substantial
increase in the average P/E ratio of stocks in the last 30 years. In
the article they said that it was debatable whether P/E ratios would
ever go back down to their historic averages, but that most everyone
agrees that P/E ratios are not going to double again. I think this
analysis supports the ~4% rate of return the economists are projecting.

Andy

An article by Mark Whitehouse in the 2/28/2005 Wall Street Journal,
page C1, surveys economists and market strategists regarding long term
expected real (after-inflation) returns on stocks, government bonds,
and corporate bonds. Here are the forecasts. Sorry if the spacing below
is messed up.

Expected real returns
2/28/2004 WSJ stocks govt. bonds corporate bonds
mean 4.81 2.80 3.33
min 4.00 1.80 2.30
max 6.50 4.00 5.00
Dudley Goldman Sachs 5.00 2.00 2.50
Siegel Wharton 6.00 1.80 2.30
Rosenberg Merrill Lynch 4.00 3.00 4.00
Harris Lehman Brothers 4.00 3.50 2.50
Shiller Yale 4.60 2.20 2.70
LaVorgna Deutsche Bank 6.50 4.00 5.00
Jain Nomura 4.50 3.50 4.00
Lonski Moody's 4.00 2.00 3.00
Malpass Bear Stearns 5.50 3.50 4.25
Glassman JP Morgan 4.00 2.50 3.00

The expected stock returns are lower than 6.8% average from 1802-2004
and the Bush administration projection of 6.5%. The article explains
that expected future real stock returns can be decomposed into

real GDP growth + dividend yield + buyback yield,

citing 1.9% + 1.7% + 1.0% = 4.6% as plausible estimates for these
numbers.