Many investment strategies are not appropriate for investors seeking to maximize after-tax returns.  High-turnover and tactical strategies that may liquidate a portfolio inefficiently generate short-term gains, and others invest in asset classes that may be less desirable to taxable investors.  Tax-sensitive strategies were marketed to overcome these limitations, but tax-efficient investing is rarely properly implemented.  Typically, these tax-sensitive portfolios are merely repackaged standard portfolios with municipal bonds substituted in—trading may be limited to once per year, but equity positions remain identical.

There’s room for improvement.

Recent market volatility after years of stable growth in US markets has shaken the faith of some investors. However, our analysis shows that historically, staying invested through volatile periods has provided superior returns when compared to selling when volatility rises and reinvesting later. Some of the greatest upside returns have happened shortly after volatility spikes, and investors who have pulled out have missed out on important opportunities for portfolio gains.

The invention of Markowitz (1952) mean-variance (MV) optimization altered the course of 20th century finance from security valuation to portfolio risk management.  The Markowitz frontier is a model of long-only institutional investment behavior representing a universal framework for asset management theory and practice.  The Capital Asset Pricing Model (CAPM) is MV preference theory based on Von Neumann and Morgenstern game theory rationality axioms.  CAPM theory was instrumental in the development of a 20th century multi-trillion dollar institutional quantitative asset management industry. 

 

By Paul Erlich

Many investors, especially those in retirement, have a rational preference for investments that provide dividends and income at higher rates than a market portfolio of stocks or both stocks and bonds. All else being equal, many retirees prefer to live off the income generated by their portfolio rather than worrying about the timing and pricing of stock or bond sales...

When selecting investments, one might be tempted to select funds claiming better expected returns. The thought process is that higher average returns over time will result in greater wealth at the end of the investment period...

For the last twenty-five years, the strategic investing mantra has been that long-term asset allocation risk policy is the single most important investment decision.  Risk policy is usually defined as the stock/bond ratio of the asset allocation.[1]  Many large financial intermediaries as well as financial advisors consider asset allocation risk policy...

The New Frontier logo is a stylized visualization of a Michaud Efficient Frontier. Composition maps, such as this one, chart the portfolio weights across the frontier, each asset portrayed with a different color on the map. The thickness of each color when the map is sliced vertically represents the portfolio weight of that asset for the efficient portfolio...

Investors often raise concerns when the stock market is near an all-time high.  I’ve discussed previously why it’s not generally a good idea to sell simply because the market attains a new high, since, if anything, historic evidence points to returns going forward from a market high being superior to average market returns.  But the rising 2017 US stock market...

In a recent article, French (2017) describes an intriguing property of Markowitz (1959) optimization.  He notes that the Markowitz optimizer (nearly) always populates the efficient frontier with a relatively small subset of the securities in the optimization universe.  Is the optimizer telling us something important about the investment value of the...

It is a common academic mantra, and of many respected investment professionals, that investing in an index fund is best for the majority of investors.  There are two reasons for this view: 1) Experience has shown that active investment strategies charge more and perform less well on average relative to many common index funds; 2) Twentieth century financial...