The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (January 31)

Taxes, taxes, taxes. Despite the hopeful articles written every year at this time, legitimate tax relief for investors seems a long way off. We all know that savings are taxed so many different ways, it's no wonder the average citizen approaches retirement with precious little socked away.

But all the legitimate beefs aside, let's look at the issue of taxes and some of our screens to separate myths from reality.

Let's assume a wealthy taxpayer to get ourselves in the worst-case scenarios. Flush Freddie makes enough each year that he's in the 39.6% tax bracket. Freddie's lucky, though, in that he lives in a state which has no personal income tax, so we'll stick to the Feds today. If you're in a high-tax state, mount a revolt at the capitol, and then adjust your tax rate appropriately when the legislature ignores us yet again.

Let's look at four cases: index funds, the Dow Approach, the Formula90 approach, and Unemotional Growth.

Index funds have averaged between 14% and 15% for the past two decades or so, toward the higher end of that range in recent years. They also generally have a low turnover and low fees. And assuming one buys and holds, most of the capital gains can be deferred over the length of the holding. So after 20 years, a $50,000 investment growing at 15% a year increases to $818,327. Take out the capital gains at the end of the 20 years (at the maximum long-term rate of 28%), and you're left with $603,195.

The same $50,000 invested in the Dow Approach (at 22%) and rolled over annually (making sure to hold a year and a day to get the long-term gains relief) and deducting taxes at 28% each year would grow to $946,544.

If we shift to the last of the long-term approaches, the Formula90 (where you buy the stocks from the Workshop with the highest Relative Strength scores and at least a 90 for EPS), the returns go up even further. At its ten-year historical growth rate of 35% and deducting 28% a year in taxes, the approach would take $50,000 to $4.48 million after 20 years.

And finally, the monthly Unemotional Growth model (which has averaged 42% over the last ten years), which would generate short-term gains, and thus be taxed at the higher 39.6% rate, would take the same $50,000 and increase it to $4.60 million after 20 years.

Yes, there's no doubt that taxes can be higher with the more aggressive short-term holdings, but if the gap in pre-tax returns is large enough to cover the tax differential, then one may still come out ahead after taxes, even paying the higher rate.

Of course, if you're in a bracket other than the highest one, the difference becomes even more conspicuous. So taxes are indeed an important consideration when deciding what route to take, but be careful to compare the after-tax compounded rates as well. That's really the comparison that matters the most. And of course, lobby like crazy for some sensible tax reform. Hey, we all need our windmills at which to tilt. This happens to be one of mine. Fool on!

Monthly Growth Screens
     (Jan. 3 to present)
24.14%  Relative Strength  
20.91%  YPEG Potential  
  8.51%  Low Price/Sales  
  5.68%  Investing for Growth  
  5.51%  S&P 500 Index  
 -3.29%  Unemotional Growth  
 -5.38%  EPS Plus RS  

Annual Value Screens
     (Jan. 1 to present)
  5.97%  Dow Jones Ind Avg  
  5.84%  Dogs of the Dow  
  4.80%  Beating the S&P  
  1.79%  Dow Combo  
  1.30%  Unemotional Value  
  1.30%  Beating the Dow  
 -0.58%  Foolish Four