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We drive tax efficiency primarily by maximizing tax loss harvesting opportunities and tax deferred account advantages.
Seed Wealth Management, Inc. focuses on after-tax returns. John C. Bogle of Vanguard fame calculates that taxes reduced the average active manager’s performance by 75bps versus 30bps for his Vanguard Total Stock Market Index fund over the previous 10 years. The difference would have been more but for the high fees and costs of the active manager universe which reduces the dividends paid to the investor. Academics, too, have been long aware that taxes do and should have a significant role in investment decisions, but when building pricing models, they conveniently assume zero taxes – it is just too sloppy to incorporate taxes given the reality of divergent and shifting tax rates. Some of the tax strategies can be subtle, but the primary strategies to generate tax efficiency are straight forward and easily implemented. The two largest tax strategies we employ are tax loss harvesting and efficient use of tax deferred accounts.
