THERE’S A LITANY of investment sins. But one may top them all. I’m guessing it’s one you haven’t given much thought to. Until recently, neither did I. The cardinal investment sin: selling your winners too soon. From 1926 to 2016, more than half of all U.S. stocks—57.4% to be exact—returned less than one-month Treasury bills. In other words, you were better off putting your money into risk-free T-bills than owning these stocks. In fact, more than half of common stocks delivered negative total returns. These stats come from an academic paper by finance professor Hendrik Bessembinder. Now here’s the real kicker: Bessembinder found that the best-performing shares, a mere 4% of all stocks, were responsible for the stock market’s entire gain over and above T-bills. The remaining 96% of companies collectively generated returns that simply matched one-month T-bills. These findings have profound implications for investors. If just 4% of stocks—we'll call them the winners—account for the lion’s share of stock market returns, you had better own them or you’re doomed to underperform the market. If you invest in total market index funds, you will own these winners by default. On the other hand, if you’re picking individual stocks, your odds aren’t great. But let’s say you’re really smart (or lucky) and happen to pick a fair share of the winners. You face another big hurdle. You must hold on to your winners and not sell them prematurely. Unfortunately, this is easier said than done. Most investors display a strong tendency to sell their winners and ride their losers. This has been termed the disposition effect, first described by behavioral economists Hersh Shefrin and Meir Statman. The disposition effect can be explained by mental accounting and loss aversion. When an investor buys a stock, a mental account is subconsciously created. The initial investment or cost basis is recorded in this account. If the position is subsequently sold for less than its cost basis, the mental account is closed at a loss. Since losses are painful—particularly to our egos—investors do everything in their power to avoid this from happening, hence the tendency for investors to cling to their losers and even double down on them. Mental accounting also explains why investors are so quick to sell their winners. Selling a position for a gain closes the mental account in the black. This feels good and strokes the investor’s ego. It also serves as a salve for the pain caused by the losers in the portfolio. Prospect theory says that investors weigh losses more heavily than equal-sized gains. That means the mental anguish from a $1,000 loss must be counterbalanced by gains far in excess of $1,000, thus serving as further impetus for selling winners. From a tax standpoint, the disposition effect is an anomaly that shouldn’t exist. After all, our tax code rewards us for taking capital losses and penalizes our capital gains. Despite these incentives, the disposition effect is alive and well. It appears that investors are willing to pay a heavy tax to preserve their self-esteem. [xyz-ihs snippet="Mobile-Subscribe"] Taxes aside, consider the enormous damage done to a portfolio by selling winners too early. As demonstrated in Bessembinder’s paper, strip out the big winners from a portfolio and you are left with middling returns that are on par with T-bills. Why are the winners so vital to a portfolio? Because of the inherent asymmetry between losers and winners. A losing stock has limited downside. At worst, it can go to zero. In fact, in Bessembinder’s study, a 100% loss was the single most frequent outcome for individual stocks over their lifetime. On the other hand, winners had virtually unlimited upside. If you talk to seasoned investors, most will confess they struggle far more with the sell decision than the buy one. A recent study of institutional investors confirms this striking discrepancy. While the authors found clear evidence of skill in buying, selling decisions underperformed badly. In fact, they were worse than random selling strategies. Given the data from Bessembinder’s paper and the behavioral biases plaguing the sell decision, perhaps the best strategy is the one espoused by Warren Buffett: "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. [Celebrated fund manager] Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds." The greatest investing sin may also explain why active managers find it so hard to beat mindless index funds. Notwithstanding lower fees, cap-weighted index funds have fundamental advantages over their actively managed brethren. As alluded to earlier, a total market index fund by definition will own all the winners. More important, it lets them ride. The manager of an index fund won’t be tempted to sell the winners, nor does he have an ego to preserve. What’s my advice to active managers and stock pickers? As much as possible, ignore your cost basis and focus on the fundamentals. Remember that the market is right most of the time, so let your losers go and enjoy the tax loss harvest. Most important, fight the urge to cash in on your winners with every fiber of your being. John Lim is a physician and author of "How to Raise Your Child's Financial IQ," which is available as both a free PDF and a Kindle edition. Follow John on Twitter @JohnTLim and check out his earlier articles. 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IF YOU HAVE a Money Market Fund (e.g. VUSXX, VMFXX), Treasury fund (e.g. SGOV), or any other Treasury ETF (e.g. VBIL), you need to know how to report it on your taxes correctly. If you don’t, you are overpaying on your state taxes unknowingly. 

How and why?

These funds hold U.S. Treasury Bills. Treasuries are exempt from state and local taxes. Of course, this only matters if you hold these funds in a taxable brokerage account, which most people do.

The broker sends you a 1099-DIV form, but it’s your responsibility to figure out how to report it on your taxes correctly. By the way, bad tax preparers can miss this sometimes, or if you self-prepare, this may be something you aren't aware of (I hope most of you reading HumbleDollar are familiar with this!)

This is one of those areas where the reporting rules are technically simple, but the execution is where people mess up. The IRS gets their share regardless (since interest is fully taxable at the federal level), but if you don’t adjust properly, your state will too, even when it shouldn’t.

The 1099-DIV doesn’t break out how much of the dividend was allocated to Treasuries. The software also wouldn’t know how much based on the 1099-DIV. This means that you generally have to figure out how to report it (or ensure your CPA does it correctly).

Now, the 1099-DIV will have a breakdown of every single stock/ETF you have, but you have to find out the percentage of a fund that holds Treasuries.

This percentage is not on your brokerage statement. It comes directly from the fund provider (Vanguard, iShares, Schwab, etc), usually buried in their “tax center” or “year-end tax supplement” pages.

Let me give you an actual example.

Say, in 2025, you received $5,000 of dividends from two funds.

Then, if you scroll down, you will see a “Detail Information” of your dividends:

We can see that $2,456.78 came from Vanguard Federal Money Market fund.

The entire $2,456.78 will be taxed at the federal level, but how do we figure out what’s taxed at the state level?

This is where the extra step comes is.

During the end of the year, the fund manager (e.g Vanguard for VMFXX) will post a “US government source income information” on their Tax page.

This report tells you what portion of the fund’s income is derived from U.S. government obligations (Treasuries), which is the key to the state tax exemption.

We can see that 66.61% of VMFXX holdings for the 2025 tax year were income derived from the U.S. government and, therefore, are not taxable at the state level.

So, we would take $2,456.78 * 0.6661 = $1,636. Of the total, $1,636 is derived from U.S. obligations, and you would only pay state taxes on the remaining ~$819.

That $2,456.78 is still fully taxable federally. This is strictly a state adjustment.

It’s also important to note that some states say "if less than 50% of the fund is from the U.S. government (like Treasury Bills), you can treat it as 0%.”

For example, California, Connecticut, and New York are some of these states. So, if the fund has only 35% coming from the Treasury, you shouldn’t even calculate the exempt amount for these states.

Now, if you buy Treasuries directly from TreasuryDirect, they will send you a 1099-INT, and you can just enter that information directly into the tax software. No extra calculations are needed. That’s because the income is already clearly identified as U.S. government interest, no allocation required.

So, how do you report that dividend interest calculation?

In most tax softwares, after entering the 1099-DIV, it will ask: "Did a portion of dividends came from a U.S. Government interest?'

So, you would just check it off/select and enter the amount from Treasuries ($1,636 in our example).

Behind the scenes, this flows into your state return as a subtraction or adjustment, depending on the state.

Some software might ask for the percentage of dividends that are state tax exempt. However, this is a bit tricky because you might receive other dividends in your brokerage account.

In that case, calculate the amount from the Treasury, say $1,636, and divide it by your total dividend amount (e.g. $5,000)

If you have someone do your taxes and you have some of these Money Market Funds or other Treasury ETFs, double-check your state tax return and see the amounts reported. This will save you some money. It's also not too late to amend your tax return if this was missed.

Specifically, look for a “U.S. government interest subtraction” or similarly labeled line item on your state return. If it’s zero and you held these funds, that’s a red flag.

If you live in a no tax state, this would not apply to you, but still good to know in case you move!

I hope you found this one valuable.

  Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.