The long-term capital gains tax on equity returns of 10% may not seem as much but it makes a huge difference if you are one of those “long-term” mutual fund investors who switch funds every year. To think through the effect of the tax on compounded returns, imagine a simple scenario where you invest in the midcap index and just sell and buy it back at the end of every year. In this hypothetical scenario, from the year 2002 through now, gross returns of buy-and-hold would have been 2245% vs. 1754% after tax. That’s ~22% of profits gone poof.
Will mutual fund investors be better behaved given this new normal?
Code and more charts on github.
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