Why should after-tax returns be considered when evaluating performance?

• A. Because taxes affect true net performance.
• B. Because taxes do not affect performance.
• C. Because only capital gains taxes matter.
• D. Because taxes only affect retirees.

Answer: (A)

After-tax returns show how much wealth you actually keep after taxes, which is the real measure of performance. Taxes reduce gains from capital gains, dividends, and interest, and the impact varies with the income type and your tax situation. A portfolio with high pretax returns can end up with lower net returns after taxes if it generates more taxable income. Evaluating performance on an after-tax basis allows you to compare investments fairly and see which one truly performs best for you. Taxes affect all investors and all income types, not only retirees, and they matter regardless of account type.