I think “technology” shouldn’t really be considered an asset class. It’s just the basis for doing business. Retail (AMZN, SHOP), finance (PAYC, BOFI), advertising (FB, GOOG), all rely on technology to some extent. Then there’s the tech infrastructure (hardware, like ANET, or software, like TWLO, HDP).
As to the tax on capital gains, what kind of dividend yield would be required to equate to an 11 bagger minus long term capital gains since 2009 or 2007, which is the last time AAPL was in the teens? My guess is somewhere around 20%, even if you assume the dividends are completely tax free. If someone can reliably pick investments that yield 20% tax free, more power to them. For others, investing in stocks for the hopes of capital gains is still worthwhile.
Thanks IRdoc, I couldn’t say it better myself.
Saul
Hi ED:
maybe they qualify for the much lower long-term capital gain tax rate.
Maybe they do. I took the 30% as an average. There might be a state tax also to consider. Maybe there are other taxable losses to offset the gain -Maybe it’s in an IRA My point is-- You don’t make purchases with bags–You make purchases with money. Converting bags to money usually entails an exchange cost.
Dividends are generally taxed at the same rate as ordinary income, unless they’re in the “return of capital” category. Do you get a lot of that kind of dividend?
Good question–The answer is yes. In 2016 92% of all the dividend/distributions I received in all accounts were in some way tax deferred or “return of capital” My biggest taxable event usually is the RMD’s I have to withdraw from my IRA’s each year. The RMD money is transferred to my taxable account early in the year where it is put back to work deferring additional income. Money is regularly withdrawn from taxable accounts to pay bills as I have no other income than minimal SS and I have to have money available to pay FED and STATE taxes and Estimates when they are due in April.
Best Regards
b&w
1 Like
It takes courage to make money in the stock market
The argument to ignore the diversification is summed up in that one sentence beautifully. The main reason for diversification is not to make money but to spread the risk.
If you are someone who is young or having little money there is no point in playing defense. On the other hand if you are someone who is in 50’s and have accumulated decent money and while you want the returns of the stock market but wanted a way to protect your portfolio from certain risks, you think about diversification.
In a bull market everyone is a genius. Those who play defense play the long game of full cycle and often they miss few % during the raising bull market. That’s the sacrifice you want to make unless you are focused on beating the market, etc. If you are focused on say 8% return then you think about diversification.
6 Likes
The argument to ignore the diversification is summed up in that one sentence beautifully. The main reason for diversification is not to make money but to spread the risk.
To be “In The Market” is by definition “To Try To Make Money”
There is no point to be in the market–If your goal is not to make money IMHO
b&w
1 Like
I said,
Apple is an 11 bagger for me. Amazon is a 5 bagger.
B&W replied.
That is impressive. And I am glad for you. Have you given any thought as to what would remain if you were to have to liquidate those stocks from a taxable account?
I’m a small time investor, so it’s not like it’s a huge sum.
My Apple and Amazon shares are both in an IRA. One is in a Roth and the other is in a Traditional. I hope to hold both positions for a long time, but we shall see.
Fool on,
mazske
Long Apple and Amazon
2 Likes
If you are in a 30% fed & State bracket it would cost about $40 per share of AAPL and $215 per AMZN share in taxes due, to liquidate. While AAPL is currently paying you about 1.5% annually in dividends —AMZN is paying you absolutely nothing and probably will continue paying nothing for years to come.
fwiw: http://www.schwab.com/public/schwab/nn/articles/Taxes-Whats-…
Cause dividend income is taxed immediately in the year incurred, unrealized capital gains - which are unrealized of course which means not sold - are never taxed, allowing compounding to happen over a longer length of time which means you are a lot better off from securities that don’t pay dividends which appreciate at the same rate that securities that do pay them. Thus, you always want to favor companies with a high return on equity and opportunity to continually reinvest those gains (a premium business indeed) precisely because they can compound internally, delaying the tax man for forever ideally.
Nobody disputes this, so you don’t want to make dividend payments - which by the way I like just fine (in part because they are a steady capital commitment which is more logical than the idoicy that sometimes goes into many buyback plans) - a singular focus with an investment. One thing - yes - but not the most important thing.
Bottom line - dividends are a capital decision ONLY and should be viewed that way, not the be-all and end-all of an investment selection process.
–
Course, if you need to sell, it isn’t like the old days when you had to pay a lot - you can pay $5 or even less with an Interactive Broker.
4 Likes
As an extreme example of non-diversification, I have to share this anecdote.
My Father started buying Exxon stock in 1968 and never bought another company until last year when he bought 5 shares of AMZN! His rationale being that Exxon was the best company in the world so why would he invest in an inferior company. Starting in 1990 when I realized what he was doing, I pleaded with him to diversify. He didn’t listen; I gave up at some point.
I thought he was an idiot but now he looks like a genius.
He is now long retired and I calculate that he receives dividend payments equal to approximately 100% of his total invested capital. That’s like receiving your lifetime Social Security contributions every year. Pretty good retirement plan.
25 Likes
Great story about your father’s investments in Exxon, Joe.
Exxon has grown into a monster cash machine.
Wish I had done exactly the same thing in 1968.
Jim
I see Amazon as a company that specializes in building super low friction infrastructure then renting it out to whomever might be interested. Anyone can sell anything on Amazon (with a few constraints) and utilize Amazon’s web presence, security, ordering, warehousing, shipping, returns, even performance stats, etc. Virtually all the friction of setting up your own online retail is handled via Amazon’s infrastructure.
Same deal with AWS, servers, networking, security, back-ups, disaster recovery, a lot of bundled functions, etc. are all in place. You don’t need an IT department to build all these data center functions. Just pay a very reasonable fee and you’re good to go.
4 Likes
This thread made me look at my entire portfolio to see how diversified I was in the alphabet.
I have every letter except X and Z.
If anyone can recommend stocks starting with these two letters please let me know as I
now won’t sleep at night until I am completely diversified.
Is Xerox still a publicly traded company?
Chris
2 Likes