Predicting Future Returns

Comment on “No Long-Term Link Between Past and Future Fund Performance,” in the Briefly Noted column in the February 2016 AAII Journal.

This article says to use one-year returns to predict future returns, but Mark Hulbert said to use 10-year returns to find overperformance. Has anyone resolved the contradiction? By the way, what happened to cause the abrupt discontinuance of the Hulbert Financial Digest? Does anything replace it?
—R. Thornley from Alaska

Editor Charles Rotblut, CFA, responds:

There is research showing a momentum effect regarding stocks: Stocks whose annual and 26-week relative price returns rank within the top 60% of all stocks tend to continue outperforming over the next 12 months. To the extent that a fund stays allocated to those stocks, its performance should benefit.

Mark Hulbert ended his newsletter on MarketWatch in February. In his final issue, he wrote, “The world today is a lot different than it was in 1980, when my goal of independently tracking investment advisers’ performances was downright revolutionary. In today’s world, in contrast, awash as it is in Big Data, it seems to be less needed. That, at least, is the judgment of the market.” Mark will continue writing commentary for the MarketWatch website.

Dividends Versus Earned Income

Post on the AAII Discussion Boards on January 15, 2016.

I am wondering if there is anyone with tax knowledge who can answer a question. Let’s say I am single and have $64,000 in earned income, right in the middle of the 25% bracket. I also have $400,000 in qualified dividends (15% tax rate). Is my adjusted gross income (AGI) considered $464,000, putting me in the 39.6% bracket and therefore paying 39.6% on my $64,000 income and 20% on my dividends? Or are they handled separately: $64,000 at 25% and $400,000 at 15%?
— User “PEGRATIO”

Barbara Weltman at J.K. Lasser responds:

Even though capital gains and qualified dividends are taxed at lower rates as compared with rates on ordinary income, capital gains and qualified dividends are taken into account in determining taxable income. It is the amount of taxable income that determines whether the rate on this investment income is taxed at zero, 15% or 20%. Such income is considered investment income that may be subject to the net investment income (NII) tax for those with modified adjusted gross income over a threshold amount ($250,000 for joint filers, $200,000 for singles, $125,000 for married persons filing separate returns).

For addtional guidance, go to www.irs.gov.