Do You Sacrifice Tax Efficiency for Portfolio Efficiency?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Random Walker
Posts: 2230
Joined: Fri Feb 23, 2007 8:21 pm

Do You Sacrifice Tax Efficiency for Portfolio Efficiency?

Post by Random Walker » Wed Dec 13, 2017 5:45 pm

General investing advice is to place tax inefficient asset classes (bonds, value, alternatives, REITs) in tax advantaged accounts and tax efficient asset classes (total market equity funds) in taxable accounts. But tax advantaged space can become limited and we can be forced to stray from ideal asset locations. I used to be highly focused on asset location and tax efficiency. Ive relaxed on that a bit now. I initially started by cooling off my AA substantially by increasing % bonds. Then, as new tax inefficient alternative investments (AQR Style Premia, AQR TS Momentum, alternative lending, reinsurance, variance risk) have become available, I have substituted them in my portfolio for municipal bonds. My thinking is that the diversification benefits are big, and the expected after tax return is still substantially larger than the bonds they are replacing. Have others chosen tax inefficient investments for their taxable accounts for the sake of portfolio efficiency? Curious to hear about the asset location trade offs others have confronted.

Dave

User avatar
Sandtrap
Posts: 3249
Joined: Sat Nov 26, 2016 6:32 pm
Location: HawaiišŸ˜€ Northern AZ.šŸ˜³

Re: Do You Sacrifice Tax Efficiency for Portfolio Efficiency?

Post by Sandtrap » Wed Dec 13, 2017 6:19 pm

yes.
j :D

User avatar
Phineas J. Whoopee
Posts: 6810
Joined: Sun Dec 18, 2011 6:18 pm

Re: Do You Sacrifice Tax Efficiency for Portfolio Efficiency?

Post by Phineas J. Whoopee » Wed Dec 13, 2017 7:55 pm

I've posted about the Efficient Market Hypothesis and its ideas, it's only a hypothesis after all, regarding informational efficiency.

I'd like to respond to your original post, but I don't know how you are using the word efficiency in this context. Can you please clarify?

There is no optimization in investing, which is unlike engineering in case that's the context you're coming from. It may not be where you're coming from.

PJW

Random Walker
Posts: 2230
Joined: Fri Feb 23, 2007 8:21 pm

Re: Do You Sacrifice Tax Efficiency for Portfolio Efficiency?

Post by Random Walker » Wed Dec 13, 2017 8:21 pm

By portfolio efficiency I mean increasing return per unit volatility (increasing Sharpe ratio) / moving closer towards the northwest corner of an efficient frontier.

Dave

User avatar
triceratop
Moderator
Posts: 4099
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: Do You Sacrifice Tax Efficiency for Portfolio Efficiency?

Post by triceratop » Wed Dec 13, 2017 8:44 pm

I own some VSS in taxable which is about as much of a tradeoff as I am willing to do.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

TropikThunder
Posts: 688
Joined: Sun Apr 03, 2016 5:41 pm

Re: Do You Sacrifice Tax Efficiency for Portfolio Efficiency?

Post by TropikThunder » Wed Dec 13, 2017 9:14 pm

Random Walker wrote: ā†‘
Wed Dec 13, 2017 5:45 pm
But tax advantaged space can become limited and we can be forced to stray from ideal asset locations.
Dave
One observation for perspective: the vast majority of people in the US (sadly) don't save enough to max their tax advantaged space, and thus have no "where do I put the extra" worries. For example, I can defer a total of ~$34,000 a year to fill my 403b, IRA, and HSA. If I had any left over for taxable, I would consider that a victory in itself and not sweat the allocation. It's a good problem to have, right?

Post Reply