In Defense Of Investing In Individual Securities

Written By: Terry L. Zivney and James P. Hoban, Jr.

Several papers have shown that very low turnover of assets within the mutual fund is the key to high tax efficiency. In contrast, Constantinides (1984) prescribes a nearly 100% annual turnover because tax law provides the direct investor in securities with two valuable timing options. While a mutual fund investor can sell a fund that has lost money for tax purposes, the option to sell individual securities is more valuable than the option to sell an entire portfolio. Simulation using 35 years of data confirms Constantindesý predictions, with higher terminal wealth from recognizing losses each year. Key words: Index funds, Individual investors, Investment, Portfolios, Stocks

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