No. of Recommendations: 7
Hmm, might this not work out to a portfolio that always did a lot more "sell low" than "buy low, sell high"?
You'd also gradually have a lot less diversification as time goes on, and you'd end up holding stocks for a very long time, which isn't always good.
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Using GTR1, the bottom 5 1 year return stocks have a negative return for the next 3 months and 2% return for following year. Basically cut losers, allow winners to run and reap the tax benefits.
Hmmm, I'm still a little dubious.
I'd want to see a test of the *specific* strategy proposed before putting money into it.
My concern is that, OK, maybe the bottom 5 are dregs as your test has showed.
But the next 5, and the next, and the next, and the next?
It seems to me that there aren't that many bad companies among the S&P 500. Other than at the extremes, most of them are pretty ordinary.
Absent a specific test, a plausible alternative theory would be that you are forever selling whatever is currently cheap, and keeping whatever is currently expensive.
There will certainly be some of that effect...would it dominate or not? I am unwilling to just guess.
Maybe your strategy is an excellent one, and I certainly haven't tested it.
But it seems like it has perhaps (?) been arrived at by placing tax concerns above return concerns.
That usually isn't the optimal strategy for maximizing after-tax returns.
If one wanted a "drop the losers" strategy, my starting point would be more like this: Keep the best firms based on their [relatively recent] business metrics, not based on their price performance ending at the current price.
If that strategy works (admittedly a big if), you'll be doing sufficiently well over time that you'll be content to pay the higher taxes on it.
I'd rather pay $100 tax on $300 of returns than pay $50 tax on $200 of returns.
Jim
