Portfolio research has examined
the long-term impact of expenses and taxes on investment returns and concluded
that, while asset allocation remains the most important factor affecting variability
of returns, keeping costs and taxes low is an important factor for investors
who are trying to maximize return.
Because mutual funds may
distribute capital gains throughout the year, mutual fund investors are often
concerned about losing investment returns to taxes. But individual stock and
bond investors are vulnerable to taxes as well, depending on how they manage
their investments.
Return lost to taxes sucks, but
the good news is you can exercise a good deal of control here. Think about
this: diversification and asset allocation are great tools for helping to
reduce portfolio volatility and variability, but we're still going to be
subjected to the short-term moves of the market, no matter how diligent we
might be in setting up our portfolio and selecting our investments. Where we
have the greatest degree of control is the area of expenses and tax-efficient
implementation. Doesn't it make sense that where we can exercise the most control,
we should?
Below is a table that displays
where investors who want to minimize taxes may want to place their investments.
|
Taxable accounts
|
Tax-deferred accounts
such as traditional IRAs, 401(k)s and deferred annuities
|
|
Here,
you'd ideally place...
|
Here, you'd ideally
place...
|
|
Individual stocks you plan
to hold more than one year
|
Individual stocks you plan to hold one year or
less
|
|
Tax-managed
stock funds, index funds, exchange-traded funds (ETFs), low-turnover
stock funds
|
Actively managed funds
that may generate significant short-term capital gains
|
|
Stocks or mutual funds
that pay qualified dividends
|
Taxable bond funds, zero-coupon bonds,
inflation-protected bonds or high-yield bond funds
|
|
Municipal
bonds, I Bonds (savings bonds)
|
Real estate investment
trusts (REITs)
Private equity,
partnerships (IRA only)
|
Source: Schwab Insights
