An Investment Strategy That Always Works


We’re all looking for an investment strategy that works consistently. Perhaps a valuation technique, a technical strategy, or a way to predict which funds will outperform.

While investors go to great lengths to create such cleverly named strategies as “Japanese cloud” formations and “economic surprise” indicators, no methodology seems to work all the time.

However, there is one strategy that absolutely never fails to boost after-tax returns, and yet it is so often overlooked: long-term investing, so you can get long-term capital gains tax treatment.

Many investors boast that they are long-term investors, but how many of us truly are? Any number of things tends to push us out of our long-term positions, whether it’s a market nosedive or a threatening global event. Let’s face it: The stock market is a psychological conundrum, and we’re all vulnerable to its clever head-fakes. This is especially true during retirement, when we’re carefully preserving capital and we always have one eye on the exits.

But we shouldn’t; we should be disciplined. We should be able to pick up bargains after downside panics, hold on while the market climbs its “wall of worry,” and rebalance back to our asset allocation when everyone is bragging about their gains. But we don’t. And we miss out on perhaps the best perk the U.S. Government offers investors: long-term capital gains tax treatment.

The current fiscal cliff negotiations may reduce this advantage somewhat. While it’s impossible to know how the tax structure will change, it’s likely that long-term capital gains will continue to provide some advantage, though perhaps less than in 2012. On the other hand, any edge in generating after-tax returns should be considered, especially during our retirement years, when our allocation to equities is generally lower and we should maximize whatever returns we can garner.