Since broad index fund products typically have less turnover than actively managed portfolios, they tend to trigger lower capital gains tax
by Andrew Lo and Stephen Foerster, reviews the work of 10 of the most prominent academics in the world of investing, including six Nobel laureates. They are asked to describe the investment portfolio most likely to produce the highest return combined with relatively low volatility.
This reality, surprising to many, has been confirmed by numerous objective studies. It is a point often made by Warren Buffett. Undoubtedly, some people would be. But there is another inconvenient truth at play here. For more than 30 years, independent investment research firm Dalbar has compared the investment return of funds and investors in those same funds. Over time, the average investor dramatically underperforms the fund in which they are invested. For example, over the 30-year period ended Dec. 31, 2021, the S&P 500 index had an annual return of 10.
There are also tax planning advantages to owning individual companies. For example, if you need to sell shares to raise money, you can elect to sell those with the lowest unrealized capital gains. You can’t do this if you own a fund.
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