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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Tuesday, August 01, 2006

Stocks, Bonds, Treasury Bills and Taxes

As you might guess, taxes have a major impact on the overall perfromance of an investment portfolio. Stocks are one of the few asset classes that has provided significant after-tax growth from 1925-2000.

Examing returns after-taxes is a humbling experience because your winners do not seem as good as they did before you accounted for taxes. In this time period investments after taxes for stocks were 8.5%; Municipal bonds (exempt from federal taxes) 4.2%; government bonds 3.8%; and Treasury bills at 2.2%. Remember, inflation in this time period was 3.1%, so when that is added to the equation the results are even more somber. After taxes and inflation you actually lose money in treasury bills. Government and municipal bonds bareful outpace inflation. Finalyy, you will see that stocks will give you 5.4% after taxes and inflation.

So if you want your portfolio to grow over time bonds can help in diversification, but hurt you in performance.

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