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9/28/07
How are Taxes and Inflation Affecting Your Returns?
Proprietary Graphs, Tables and Analyses - All Rights Reserved
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Taxes and inflation should always be considered when making investments. As you can see from the first table,
taxes and inflation decimated the returns of short term bonds. Short term bonds are generally not the place to
make
lots of money.  They are a good vehicle for parking your capital until better opportunities are available. They also
provide diversification.  It is typically necessary to take more risk to prepare for retirement (stocks, longer term
bonds, etc.) Stocks have typically generated higher gains, lower taxes and
much more risk. If you would like to see
SignalTrend's inflation forecast, click the "More" link on the top navigation bar of this page. Then click the "Inflation
Forecast" link. Historical inflation figures are also available on that page.

SignalTrend's unemotional computer timing system is currently bullish, but it may change its buy / sell
signal in the near future. If that happens, SignalTrend will notify you by email. Remember, SignalTrend's
stock market timing system was backtested 100 years with excellent results!

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Backtested 100 Years !
Summary:  
15% stock gains earn only 9.75% per year after taxes and inflation.
10% stock gains earn only 5.5% per year after taxes and inflation.
 5% yields from short term bonds earn only .75% per year after taxes and inflation.

Over the last ten years, short term bond yields have averaged about 5%. Stocks gained roughly 7%. Since 1975,
stocks have returned more than 12% per year. Interest and dividends are taxed at ordinary tax rates which are higher
than long term capital gain tax rates. Gains from stocks held for more than one year qualify for long term capital gain
rates. Your tax rates may differ from those used in these tables.
How much are you really making in your bond fund? We assume an original investment of $10,000, 5% yield,  25%
tax bracket and 3% inflation. Looking at the top row, you'll see the original investment of $10,000 which earned 5%
during the first year ($500). Taxes on the $500 income were $125 (25% x $500 = $125). The $10,000 lost $300 of
purchasing power because of inflation at 3% (3% x $10,000 = $300). So the value of the $10,000 at year-end in
2006 dollars was $10,075 ($10,000 + 500 - $125 - $300 = $10,075) The after tax / after inflation return was only
.75%. The calculation for each year is the same, showing that a $10,000 investment will grow to $10,776 in 10
years.  With current inflation and tax rates, investments yielding 5% are doing little more than treading water (an  
after tax / after inflation annual gain of
.75% per year).
Value at
Beginning
of Year
Return
(After Tax,
After
Inflation)
Value at
Year-end
in 2006
Dollars
Inflation
at 3%
Per Year
Taxes at
25%
Income at
5% Per
Year
$10,000
$10,075
$10,151
$10,227
$10,303
$10,381
$10,459
$10,537
$10,616
$10,696
0.75%
0.75%
0.75%
0.75%
0.75%
0.75%
0.75%
0.75%
0.75%
0.75%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
= $10,075
= $10,151
= $10,227
= $10,303
= $10,381
= $10,459
= $10,537
= $10,616
= $10,696
= $10,776
- $300
- $302
- $305
- $307
- $309
- $311
- $314
- $316
- $318
- $321
- $125
- $126
- $127
- $128
- $129
- $130
- $131
- $132
- $133
- $134
+ $500
+ $504
+ $508
+ $511
+ $515
+ $519
+ $523
+ $527
+ $531
+ $535
Bond Return Analysis
$10,000, invested for 10 years with an annual gain, tax rate and inflation of 10%, 15%, and 3%, respectively, would
grow to $17,081 (an annual after tax / after inflation gain of 5.5% per year).
Value at
Beginning
of Year
Return
(After Tax,
After
Inflation)
Value at
Year-end
in 2006
Dollars
Inflation
at 3%
Per Year
Capital
Gain Taxes
at 15%
10% Gain
Per Year
$10,000
$10,550
$11,130
$11,742
$12,388
$13,070
$13,788
$14,547
$15,347
$16,191
5.5%
5.5%
5.5%
5.5%
5.5%
5.5%
5.5%
5.5%
5.5%
5.5%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
= $10,550
= $11,130
= $11,742
= $12,388
= $13,070
= $13,788
= $14,547
= $15,347
= $16,191
= $17,081
- $300
- $317
- $334
- $352
- $372
- $392
- $414
- $436
- $460
- $486
- $150
- $158
- $167
- $176
- $186
- $196
- $207
- $218
- $230
- $243
+ $1,000
+ $1,055
+ $1,113
+ $1,174
+ $1,239
+ $1,307
+ $1,379
+ $1,455
+ $1,535
+ $1,619
Stock Gain Analysis (10% Annual Gain)
$10,000, invested for 10 years with an annual gain, tax rate and inflation of 15%, 15%, and 3%, respectively, would
grow to $25,354 (an annual after tax / after inflation gain of 9.75% per year).
Value at
Beginning
of Year
Return
(After Tax,
After
Inflation)
Value at
Year-end
in 2006
Dollars
Inflation
at 3%
Per Year
Capital
Gain Taxes
at 15%
15% Gain
Per year
$10,000
$10,975
$12,045
$13,219
$14,508
$15,923
$17,475
$19,179
$21,049
$23,102
9.75%
9.75%
9.75%
9.75%
9.75%
9.75%
9.75%
9.75%
9.75%
9.75%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
= $10,975
= $12,045
= $13,219
= $14,508
= $15,923
= $17,475
= $19,179
= $21,049
= $23,102
= $25,354
- $300
- $329
- $361
- $397
- $435
- $478
- $524
- $575
- $631
- $693
- $225
- $247
- $271
- $297
- $326
- $358
- $393
- $432
- $474
- $520
+ $1,500
+ $1,646
+ $1,807
+ $1,983
+ $2,176
+ $2,388
+ $2,621
+ $2,877
+ $3,157
+ $3,465
Stock Gain Analysis (15% Annual Gain)
SignalTrend is not a tax advisor and is not giving tax advice. Consult your tax advisor before making any
investment decisions.