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Primary Article

After-Tax Returns on Stocks Versus Bonds for the High Tax Bracket Investor

Niall J. Gannon and Michael J. Blum
The Journal of Wealth Management Fall 2006, 9 (2) 35-45; DOI: https://doi.org/10.3905/jwm.2006.644217
Niall J. Gannon
The senior vice president of wealth management and senior portfolio management director with The Gannon Group at Smith Barney in Clayton, MO.
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  • For correspondence: niall.j.gannon@smithbarney.com
Michael J. Blum
A research assistant to Niall J. Gannon and is a candidate for BSBA in Olin School of Business at Washington University in Clayton, MO.
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  • For correspondence: blumm@wustl.edu
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Abstract

The notion that stocks outperform bonds over the long run is a widely accepted principle of basic investing. This conclusion may not be as applicable, however, to a high tax bracket investor as it would be to a tax-exempt portfolio. Ibbotson Associates reports that between 1925 and 2004, the annualized compounded return on stocks (represented by the S&P 500) was 10.4% compared to the return on government bonds at 5.4%. The gross return on equities was nearly double the gross return on bonds. “Stocks for the Long Run,” written by Wharton professor Jeremy Siegel, also concluded that stocks have proven to be better investments than bonds over the long run. It is difficult to argue with Siegel's conclusion if one is a non-taxable investor such as a pension, endowment, or even for the average American's 401(k) account. However, does this advice apply to the wealthy family who pays taxes on investment income and capital gains at the highest rates? The article shows the annualized after-tax portfolio return to be 6.72% and the difference between the returns on equities and bonds to be only 58 basis points. And, in the most extreme scenarios, equities may have equaled or underperformed bonds on an after-tax basis.

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Vol. 9, Issue 2
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After-Tax Returns on Stocks Versus Bonds for the High Tax Bracket Investor
Niall J. Gannon, Michael J. Blum
The Journal of Wealth Management Jul 2006, 9 (2) 35-45; DOI: 10.3905/jwm.2006.644217

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After-Tax Returns on Stocks Versus Bonds for the High Tax Bracket Investor
Niall J. Gannon, Michael J. Blum
The Journal of Wealth Management Jul 2006, 9 (2) 35-45; DOI: 10.3905/jwm.2006.644217
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