BOSTON ( TheStreet) -- If you're receiving a tax refund this year, congratulations! You just gave the U.S. government a generous interest-free loan over the past year while missing out on gains of 75% or more in stocks such as Netflix (NFLX) and Caterpillar (CAT).
With so much money about to be repaid to workers, investment advisors are right to note the stock-market returns that Americans could have enjoyed if their withholdings had been different. According to the Internal Revenue Service, more than 82 million tax returns were filed by March 25. Almost 70 million were due refunds, with the average refund checking in at $2,952. That means the IRS has already committed to paying out more than $206 billion, and the government still expects to receive another 59 million returns before the April 18 filing deadline. (The deadline is usually April 15.)
Those receiving tax refunds should think about opportunity costs, though. U.S. workers have an average annual salary of around $40,000, which means those due a refund are essentially loaning the government 7.4% of their income interest-free. By comparison, the S&P 500 rose more than 13% over the last year. While workers can't go back in time to change their withholdings, they can put that tax refund to work now.
"It's never a bad idea to put money into the market," says Greg Estes of Intrepid Capital Management, "but you need to be selective where you put it. Over the long term, if you want to protect your wealth, you need to be invested. The money market today isn't going to do you much good."If someone is lucky enough to get a tax refund, that cash certainly could be used to pay down debt or credit cards instead of invested in stocks. And fund managers stress that a tax refund won't become an instant lottery ticket if invested in the market. "Investors shouldn't think about the next three days, but where this money is going to be in the next three years," says Rich Werman, manager of the Neuberger Berman Select Equities Fund (NBEAX). "It's about investing your tax return wisely." The problem, though, is figuring out where to put their money now. The stock market has risen steadily and investors should ask whether there is more room to run or if they're buying in at the top. Thankfully, several mutual fund managers gave TheStreet their current investing strategy and have several stock picks that are worthy of tax refund dollars, which are detailed on the following pages.