Investors often focus on returns. That makes sense. Returns are visible, measurable, and easy to compare.
But for taxable investors, the more important question is not simply, “How much did I make?” It is, “How much did I actually keep?”
A recent study looked at a century of U.S. equity returns through that exact lens. The study simulated a taxable investor holding the broad U.S. stock market from 1926 through 2025, applying the federal tax rules in force each year, including dividend taxes, capital gains rules, tax-lot accounting, capital loss limits, and carryforwards.
The conclusion was striking: federal taxes reduced long-horizon equity wealth by more than one-third.
Looking across eight overlapping 30-year periods from 1926 through 2025, the study found that the average pre-tax equity return was 10.47% per year. After federal taxes, that fell to 7.00% — a tax drag of 3.47 percentage points annually. Put differently, federal taxes alone consumed roughly one-third of the nominal pre-tax return, before accounting for state taxes, investment fees, or inflation.
Even in the modern 1996–2025 period, when tax rates were relatively favorable by historical standards, the study found that federal taxes reduced annualized equity returns by about 1.65 percentage points per year. Over 30 years, that translated into a meaningful gap between market returns and investor returns.
Historically, the gap was even larger. Across overlapping 30-year periods, the average annual tax drag was 3.47 percentage points. In the worst window, 1936–1965, it reached 5.38 percentage points per year, largely because dividends were taxed at much higher rates.
The lesson is not that investors should avoid taxable accounts. Taxable portfolios can be flexible, powerful tools. But taxes are not a footnote. They are one of the largest wedges between what the market delivers and what an investor ultimately receives.
That is why tax-aware planning matters.
Asset location, withdrawal sequencing, tax-loss harvesting, charitable giving strategies, Roth conversions, capital gains management, and estate planning are not separate from investment management. They are part of investment management.
A portfolio that looks impressive before taxes may be far less compelling after taxes. And a strategy that modestly improves after-tax outcomes can compound into significant long-term value.
At Hanover, we often say: it is not just about how much you make. It is about how much you keep.
A century of investment tax history makes that point very clearly.