<THE HARRY JONES PORTFOLIO>
by Harry Jones
(July 1, 1999) -- I tell my children, who are growing up already, that here's what the working world wants from you: as much as it can get, while giving you the going market rate for your time. Of course, the market rate is always figured to leave plenty of upside for the company paying it. Plenty of upside. I've been reading about this for a reason.
At a good company, your time always ends up being much more valuable than the market rate that you're paid. The going market rate is set to ensure economic profit, and so each salary is decided to the very low end of the scale. "What is the least that we can pay such a such a person to keep them aboard and productive? That is what we pay. Until we must pay more."
This isn't right or wrong, really, though you could argue it's ugly. It's just how business thinks.
See, I'm trying to talk my sons into staying on the farm. But I mean everything I say.
by Jeff Fischer (TMF Jeff)
We typically receive Harry's columns a few hours before we publish them; or sometimes a few days before, randomly; or not at all. Always interesting. The Fool's annual company meeting (the five-year anniversary is this year) occurs at the end of this month. Perhaps we'll meet Harry Jones.
Today's quick topic is taxes. No whining jokes about them however. Complaining about taxes makes one about as dull as someone who sits around lamenting that they're not 21 anymore. Taxes are inevitable if you want a legal, working life in the United States of America. Everyone pays, everyone benefits. Or, it might be more appealing said this way: everyone benefits, everyone pays.
Millions of acres of parks, most of them free. Local government-sponsored events every summer; parades, picnics; celebrations. Lasting monuments. Government publications. History archives. Museums, all free in the capital. Fourth of July fireworks on the National Mall. Freedom. National security. 400 page reports detailing what happens in the White House. Your tax dollars are holding their own for you. When you have income in this fat, happy country -- a country with one of the best standards of living in the world -- you pay a tax on it. Fair enough? Good. Better be.
With managed mutual funds, however, you typically pay far too much tax.
Now, that's not fair, nor good. It just shouldn't happen! It does, however, all of the time, ever year. It happens due to turnover, or asset sales. Whenever a mutual fund sells a profitable holding, all of the fund owners must pay a capital gains tax. Because the average mutual fund sports a massive 85% turnover (meaning that 85% of its value is bought and sold, or turned over, every single year), mutual fund owners pay short-term taxes every single year. A lot of them, if there are profits.
Some managed mutual funds have turnover rates of over 200% every year. They might as well be trading funds, not investing funds. And, as you know, most mutual funds underperform the simple S&P 500 in the process of active trading. Harry's SPY investment, with its lovable quiet nature, beats almost all of the big egos on Wall Street. Meanwhile, the few managed funds that do perform better than most typically have the lowest turnover ratios. Part of the reason they do better -- other than the fact that stocks are meant to be held for a long time; hello? -- is that holders pay fewer taxes.
So it is with index funds. Index funds typically have only 4% turnover per year, so index fund owners end up keeping most of any gain. They pay the long-term tax rate when assets are finally sold, perhaps 20%, depending on their tax bracket. This means that they keep up to 80% of any gain. In actively managed, taxable mutual funds, studies show that people in higher tax brackets keep on average only 45% of any gain.
Now that's something to get riled up about! Much more so than paying Uncle Sam a little lovin' every year for running your country.
Happy Fourth of July weekend! Fool on!
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Day Month Year History HARRY +0.75% 0.75% 8.15% 8.15% S&P: +0.60% 0.60% 12.92% 12.92% NASDAQ: +0.77% 0.77% 23.42% 23.42% Rec'd # Security In At Now Change 1/4/99 16 S&P Depos 127.63 138.03 8.15% Rec'd # Security In At Value Change 1/4/99 16 S&P Depos 2042.00 2208.50 $166.50 CASH $0.00 TOTAL $2208.50 Yesterday Today Change S&P Depos 137.00 138.03 SPY +1 1/32
</THE HARRY JONES PORTFOLIO>