Maximizing Long Term Wealth

[ats5g]

If anyone remembers this rather long and complicated papers from Dammon, Spatt, and Zhang entitled "Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing", TIAA-CREF published a discussion the authors had with Mimi Lord about taxable vs. tax deferred investments;

Maximizing Long-Term Wealth Accumulation: It's not just about "what" investments to make, but also "where" to make them

- Alec

[. . . Yrs to Go]

Quote:

In this article, academic researchers discuss the advantages of placing equities in taxable accounts and taxable bonds in taxdeferred accounts in order to maximize the tax efficiency of one’s overall portfolio.

Do the "researchers" really take 12 pages to say that people should put tax advantaged asset classes (equities) in their taxable accounts and fully taxable asset classes (bonds) in their tax advantaged accounts?

[Spanky]

Quote:

Originally Posted by 3 Yrs to Go Do the "researchers" really take 12 pages to say that people should put tax advantaged asset classes (equities) in their taxable accounts and fully taxable asset classes (bonds) in their tax advantaged accounts?

For most research papers, I just read the executive summary section.

[haha]

I have read this interview several times, and it may only be because I am slow to catch on, but to me there are important and subtle points contained in this piece.

One non trivial conclusion they present is that the proportion of your assets in taxable vs. tax advantaged accounts will interact with your optimal asset allocation, rather than follow passively from it.

After reading it, I have a few questions and or quibbles. As the above posters indicate, the "Cliff Notes Summary” is that for the most part, interest earning assets belong in tax advantaged accounts, and equities in taxable accounts. One thing that occurs to me is based on the usual investing life cycle, when we are young, many of us tap out our saving capacity after we fund a 401-k or IRA, and save for a house and furniture and the normal personal capital to get a life and family going. So for* along time, most of our investable assets are likely to be in tax deferred accounts. All other things being equal, if we were to invest most of that in fixed income, our returns might be expected to be lower than if a good portion of it were in equities. (Or so the Germans would have us believe anyway.)

Therefore, our most high powered savings, those we make when we are young, would be invested at less than optimal rates.

Another doubt I have relates to the Roth IRA. IMO, the Roth represents supercharged money, so we want to strive for high returns. Yet we don't want to risk depleting our Roth, because it is hard to refill. Following from this, I feel that a Roth is tailor made for judicious speculation with a small portion of the funds, backed by very secure fixed income-say TIPS. To some extent anyway, IMO the Roth should be a standalone asset. For sure, I think one never wants to need to tap the Roth for cash needs, until late in the retirement game cycle.

Ha