Pick Your Battles: The Intersection of Investment Strategy, Tax, and Compounding Returns

In the hunt for investment value added, taxable investors need to think differently. A low-cost, low-turnover, equity-oriented strategy with broad, consistent exposure to the market is the most likely to succeed over long periods. The power of this simple approach lies in the interaction of investment strategy, tax management, and long-term compounding. After taking into consideration taxes, the cost of being wrong, and loss-harvesting capabilities, active strategies must generate 160 to 380 basis points of value added per year just to break even with this approach. If you want to fight the active management battle, do so in the knowledge that the odds are stacked against you.