Investing in stocks to “play with” anticipated taxes from funds

[smalldog]

As an investor I’m a boring Emaxis Slim All Country evangelist; and am in the privileged position to be able to invest over my NISA limit annually.

Let’s say for arguments sake: I invest JPY 400,000 per month in my taxable account for 25 years at an anticipated 7% return including dividends, there will be significant taxes to pay on the 20% upon sale (400,000 x12 x25 with 7% compound interest - profit would be around JPY 185 mill with taxes due of approx ¥37 mill).

Paying these taxes is a forgone conclusion and cannot be helped with my investing strategy.

Therefore, would it not be smart to invest this anticipated taxable amount annually (around ¥1.5 ) in higher risk / Hail Mary individual stocks?

Best case scenario - one of these stocks turn out to be something like the next Nvidia - worst case scenario - my basket of worthless stocks can be sold at the same time as my EMaxis Slim collection and the losses can be harvested and offset those from my conservative fund sale profits.

Appreciate there is an opportunity cost of not just putting the additional annually 1.5 mill into Emaxis slim, however if one has some spare cash then - assuming history repeats with IRR on such a fund - then this is somewhat a win-win (or at least can’t really lose) strategy; with potential for major upside if one does luckily pick a diamond stock.

[Deep Blue]

The fraction of stocks who produce returns over and above the index is much smaller than it would intuitively seem. A large portion of the long term index returns are generated from a small percentage of winners.

I’d stick with index funds personally. It’s better to pay more taxes on higher gains than forgo those gains by most likely making losses on losers.

[RetireJapan]

Not sure I understand: if your taxable investments are 'gambled' in individual stocks, what gains are you planning to offset with the losses?

Anything in NISA would be tax free.

I would take the 150m from boring investing myself

[smalldog]

Thanks for your replies - we are talking totally outside of NISA here (think if NISA didn’t exist - that’s a totally separate investment package). So this is offsetting the taxes from taxable account EMaxis Slim profits on purchases above NISA limit with potential losses from higher risk “lotto ticket” equities - or enjoy the profits of winner stocks and pay the taxes on everything, but who cares when you bought Nvidia in 2008?

Deep Blue - I get your point that finding such a unicorn is very unlikely, however with some spare cash sitting in a zero interest Japanese current account my thoughts are this not a stupid thing to do for a bit of “fun”? At least, I can’t see the downside…

[adamu]

The fact that you have to pay tax on the gains, is not related to whether the investment performs well.

If you make any gains, you'll pay the tax regardless.

So the question boils down to: can you beat the market? Probably not.

[Deep Blue]

Deep Blue - I get your point that finding such a unicorn is very unlikely, however with some spare cash sitting in a zero interest Japanese current account my thoughts are this not a stupid thing to do for a bit of “fun”? At least, I can’t see the downside…

As you identified in your initial post, the opportunity loss is the downside. You could put this in index funds and if you leave it long enough you’ll have made a nice return.

I also have the issue of a sizeable capital gains liability in the future but I plan to deal with it by leaving Japan and taking the capital gain elsewhere, as well as sorting out division of assets in the family, IHT planning etc.

Don’t know if this is an option for you or not.

[beanhead]

I think this strategy would probably solve your problem of having to pay taxes on any capital gains...

[RetireJapan]

Just as an aside, I have never understood the mindset of not wanting to make money because you will have to pay taxes on it. Net of taxes, you are still ahead.

Particularly with investing, which does not need to take a lot of time, etc.

[Deep Blue]

Just as an aside, I have never understood the mindset of not wanting to make money because you will have to pay taxes on it. Net of taxes, you are still ahead.

He is hoping to have to pay a lot more tax with his strategy. He hopes to hit a moonshot and find a ten or hundred bagger, outside of his index funds. This will obviously incur a higher CGT liability.

His thinking is that if this fails and he loses money it will simply reduce his CGT down the line.

[smalldog]

He is hoping to have to pay a lot more tax with his strategy. He hopes to hit a moonshot and find a ten or hundred bagger, outside of his index funds. This will obviously incur a higher CGT liability.

Thanks deep blue - a very eloquent summary of my thinking here.

Appreciate everyone’s thoughts and insights - for sure, it’s gambling with the opportunity cost of just buying even-more taxable EMaxis Slim All Country, but still glad to hear you can see the logic in what I’m considering. Will need a bit more time to figure out whether I have the b@lls to do it rather than my usual boring investing style.