How tax eats away at your investment returns

Most of us know that taxes are a drag on our investment returns, but it’s easy to underestimate how big the impact is. That’s because taxes are usually taken from nominal (before-inflation) returns, yet what really matters to our wealth is real (after-inflation) returns.

Once we account for the corrosive effect of taxes and inflation combined, the damage is far greater than the headline tax rate leads us to believe.

You can see this in the chart below. We’ve plotted investment returns under several different scenarios, using average long-term returns (since 1899) from the Credit Suisse Global Investment Returns Yearbook [...]

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