This table which I derived from a spreadsheet I downloaded from the IRS website * contains stunning data. You have probably heard that most traders lose money in the stockmarket but maybe you didn't know how badly most people lose money and how strongly the propensity to lose is related to income. This data is for 2005 and I am guessing contains loss carryovers from the great 2000-2002 bear market. Looking at short-term capital gains, the only income groups that had a net gain in aggreagte were those earning more than $5 million dollars a year. All other income groups had an aggregate net loss. For the $75,000 to $100,000 bracket for example the returns reporting net losses reported losses around four times greater than the returns reporting net gains. It gets worse for lower income groups. For long-term capital gains all income groups earning more than $100,000 reported an aggregate net gain. Again the ratio of gains on tax returns with net gains to the losses on tax returns with net losses rises directly with income.
I excluded the number of returns from the table to make it more legible. The tendency is for the lower income losing returns to lose far more than the winning returns gained. Not for there to be much larger numbers of losers.
If I've interpreted this data incorrectly, let me know. I'm planning on doing some more posts based on this data.
* The New York Times hid the information about this data deep in this article.
6 comments:
Looks like the higher income persons are better investors than the lower income persons - not much of a surprise there. A plot of total capital gain (short & long gains+losses) vs. mid-point of each income bracket looks like it would show a nice positive correlation.
It also appears that the ratio of long-term:short-term capital gains is much higher for the higher income brackets. I guess this is just another confirmation that overtrading leads to much worse performance that buy-and-hold for the average investor/speculator.
Regards
http://enoughwealth.com
Yes, this is exactly how I interpreted the numbers. What surprised me was how strong those effects were.
It's not clear that all the gains at the top are from trading. I would argue the majority is related to option exercises.
Could be some of it I guess. But, apparently if you sell the stock more than two years after being granted the option it's a long-term capital gain even if you sell the stock immediately on exercise, from what I learnt searching the web. The short-term number is very much smaller than the long term number.
Could it be that people just sell their losers and let their winners ride?
nah, that can't be it.
The lower income groups have net short and long term losses so selling losers and keeping winners doesn't explain their behavior.
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