Managing taxes are clearly an important part of any investment strategy for taxable investors. Harvesting losses, timing decisions, deferring gains can certainly add value to a portfolio. But what impact, if any, do taxes have on arriving at long term strategic asset allocation?
Our conclusion: Having tested over 100,000 randomly generated unbiased portfolios with unbiased tax rates, we discovered that taxes have an impact not only on return, but also on risk. This fact mediates the impact of taxes on asset weights, as the relative efficiency of assets is roughly the same before and after tax. Tax optimization is important and adds value to tactical asset allocation, to asset location, but is largely irrelevant for determining ex- ante long term strategic asset allocation. On a risk-adjusted return basis taxes do not matter.