Beating the S&P is easy until you subtract tax

Photo: Kelly Sikkema / Unsplash

"I beat the market this year." Maybe. But if you compared your real, after-tax result to the index's headline, gross number, you compared two things that aren't the same currency. A fair benchmark has to meet you where you actually live: after tax.

The two numbers aren't measured the same way

When you read that the S&P 500 returned some percentage, that figure usually assumes dividends are reinvested in full, with no tax taken out. It's a clean, frictionless, tax-free number. Your portfolio is none of those things. Along the way you paid:

• Tax on dividends as they arrived, often with foreign withholding skimmed at source before you saw a cent.
• Capital gains tax on anything you sold at a profit, which the index never pays because it never sells.
• Fees and spreads on every trade and, if you hold funds, an expense ratio quietly compounding against you.

So the index gets to compound gross while you compound net. Over a decade that gap is not small. Beating a tax-free benchmark with taxed money is genuinely harder than the headline suggests, and losing to it by a hair might actually be a win once you level the field.

What a fair comparison looks like

To make the contest fair you level both sides. Either you gross yourself up (hard, because it means modeling tax you didn't actually pay), or, more honestly, you tax the benchmark down: apply the same dividend and capital-gains treatment to the index that you face, in your jurisdiction, so it's carrying the same drag you are.

The tax drag also depends heavily on how you invest, not just what you hold. A buy-and-hold portfolio defers capital-gains tax for years, so it keeps more of its compounding engine intact. A high-turnover portfolio realizes gains constantly and pays tax on them every year, which is a headwind the index, and a patient investor, never faces. Two people can hold identical stocks and end up with very different after-tax returns purely because of turnover.

What Cresori does

Cresori benchmarks your portfolio net of tax, applying dividend and capital-gains treatment for your jurisdiction to the index so you're comparing like with like, instead of racing a tax-free ghost. Combined with seeing your true time-weighted return, it answers the question you actually care about: after everything the taxman and the broker took, did my choices beat just buying the index and sitting still?

This builds directly on the difference between the return that measures your investing and the return that measures your timing, which we covered in true TWR vs MWR. And a return quoted over one window can hide a lot, which is the subject of why your YTD and five-year returns don't line up.