Jan. 7, 2022 12:55 pm ET
Daniel Rasmussen, the hedge-fund fellow reviewing Andrew Lo and Stephen Foerster’s “In Pursuit of the Perfect Portfolio” (Bookshelf, Jan. 5), may have been constrained by what isn’t in the book (taxes) or by what he does for a living (investing actively). But an assessment of portfolio performance cannot be done only on a pretax basis, however hard it might seem to figure out after-tax results.
Here is a shortcut for investors: There are no income taxes on what you do not sell. You can hold a stock or an index fund forever. And when you die, your untaxed gains are forgiven permanently. Death without taxes—that is the miracle of the “step up in basis.”
If you measure any active trading strategy against after-tax, passive buying and holding of an index fund, you will see that active investing is not the way to go unless you are not just smarter than, but roughly twice as smart as, the market. I am not arguing that untaxed gains make for good policy. Actually, it is terrible policy, because it accelerates wealth inequality. But that is Congress’s problem, not yours.
Santa Monica, Calif.
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