longinvest wrote: ↑Sun Apr 12, 2020 9:36 am

It can be a bad idea to let the goal of

*minimizing taxes* dictate

*asset allocation* and

*asset location* decisions.

The most efficient approach to minimize taxes is to have no income and no assets. It's simple to do: one just has to stop working and give away all possessions, leading to reliably win the tax minimization game. Yet, this is probably

not an attractive goal for most forum members.

If the goal shouldn't be to minimize taxes, what should it be? I personally think that it should be to

aim for higher lifelong after-tax income.

Increasing lifelong after-tax income could sometimes lead to paying more taxes in the short term.

A common mistake of investors is to focus on reducing short-term taxes, instead of aiming to keep long-term after-tax income higher. The latter involves complex calculations on models of lifelong portfolio contributions and withdrawals, revealing an incredibly high level of uncertainty about future outcomes. Unfortunately, very few people take the time to make such calculations and realize how uncertain things are.

As it's much easier to make a single-year calculation of taxes to make asset allocation and asset location decisions, many investors do that and they feel confident in their decisions because they were "based on mathematics". They're often not even aware that the objective of their simple calculation (which is to minimize short-term taxes) could be counterproductive to the more logical objective of keeping lifelong after-tax income higher.

I encourage forum members to require a formal (mathematical) proof of superiority of any strong recommendation about asset allocation or asset location in delivering higher lifelong after-tax income.

For example, any recommendation of using tax-exempt bonds instead of a total-market bond index fund which isn't accompanied with a discussion of differences in risk should be questioned. Also, any recommendation of prioritarily placing bonds into tax-advantaged accounts based on short-term calculations, instead of an analysis of lifelong after-tax cash flows, should be questioned, especially if not accompanied with a discussion of the risk of unanticipated asset returns and unforeseen changes in investor circumstances or tax laws which could dramatically change things.

In the

One-Fund Portfolio thread, I've provided a mathematical proof that

*a mirrored asset allocation is more resilient in face of an unknown future than prioritizing the placement of a specific asset class (stocks or bonds) into specific tax-advantaged accounts*:

longinvest wrote: ↑Thu Oct 17, 2019 12:28 am

Here's the thing. If prioritizing bonds in tax-advantaged accounts turns out to be best over one's specific lifetime, a

*mirrored allocation* will turn out to be superior to having prioritized stocks in tax-advantaged accounts. If prioritizing stocks in tax-advantaged accounts turns out to be best over one's specific lifetime, a

*mirrored allocation* will turn out to be superior to having prioritized bonds in tax-advantaged accounts. A

*mirrored allocation* is thus mathematically guaranteed not to turn out to have been the worst location strategy among these three strategies, even if tax laws change in unexpected ways.

Some people might consider this mathematical guarantee, of not being the worst asset location strategy, "not very attractive", yet I have not seen a mathematical proof of a "more attractive" asset location strategy that is guaranteed to

*always* beat a simple mirrored allocation strategy.

It's quite similar to indexing, when you think about it. William Sharpe's

theorem guarantees that a simple total-market cap-weighted index investment strategy is guaranteed to never be worse than average (before fees). Some people might consider this mathematical guarantee "not very attractive", yet I have not seen a mathematical proof of a "more attractive" investment strategy that is guaranteed to

*always* beat it.