Investment Newsletter for the end of January 2022

The month was weak. Not a surprise given the magnificent gains of 2021.

One thing that must always be taken into account when making investment decision is taxes. Ultimately, the objective of investment is to maximize after tax income. Pre-tax income isn’t relevant. Investments gains are referred to as Capital Gains and are taxed based off of how long those investments are held.

Short term investments are investments that are held shorter than one year. For example, if you buy stock X in February 2022 and sell it in April 2022, that would be considered a short-term investment. Any gains from that investment would be taxed at the same rate that ordinary income is.

Long term investments are investments that are held for one year or more. For example, if you buy stock X in February 2022 and sell it in April 2023, that would be considered a long-term investment. Any gains from that investment would be taxed at a lower rate in comparison to a short-term investment. Long term capital gains are taxed at a preferential rate because it is believed that holding investments for a longer period of time makes the various capital asset markets smoother and more stable.

This particular tax structure of short term and long term applies to all capital assets. Examples are stocks, bonds, real estate, paintings, etc. While the terminology used is different, this type of tax structure is also used for dividends. To what degree dividends are taxed depends on whether the stock meets particular requirements and how long the stock has been held prior to its es-dividend date. If the requirements are satisfied the dividend is considered qualified and is taxed like long term capital gains. If it doesn’t meet the requirements, then the dividend is unqualified and is taxed like ordinary income.

Based on these tax considerations, it would simple to imagine a situation when comparing two investment capital gains where the pre-tax income of the first investments is higher than the second, but the after-tax income of the second is higher than the first. As after-tax income is the thing that is most important you are going to want to invest the second option rather than the first.

If you have any questions about your investments (or your tax), please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.


Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

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