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...