My Sunday Washington Post Business Section column is out. This morning, we revisit the advantages the long term passive indexer has versus short term active traders.
The print version had the full headline The trader can narrow the gap but won’t win, while online, it was called No matter what, the long-term investor comes out ahead of the short-term trader.
Many of you wrote in to point out some errors I made that disadvantaged the trader. In this week’s column, I took reader’s suggestions about taxes and dividends. I made the appropriate adjustments in the trader’s favor:
“Last time, we looked at why traders are at an almost insurmountable disadvantage against investors due to short-term capital gains taxes. Many of you wrote in to note several factors that would have allowed the active trader to narrow the gap against the long-term investor. A few of you asked how likely it was that a trader would outperform by that margin year after year. This week, I want to review those issues readers raised, looking to see how they affected our competition between the long-term indexer and the short-term trader.
Spoiler alert: The issues to which I gave short shrift did improve the performance of the trader, but not nearly enough to narrow the gap between the two. Let’s look at the details”
The takeaway is that short term trader’s have a remarkable bogey to over come: The much higher rate they pay for capital taxes.
No matter what, the long-term investor comes out ahead of the short-term trader
Washington Post, August 10 2014