What it means; why it counts.
The after-tax return vs. the pretax return. Everyone wants their investments to perform well. But for many investors it’s their after-tax return that may make all the difference. After all, even if your portfolio is earning double-digit returns, it may not matter if you’re also losing a percent of those earnings to taxes.1
Holding onto assets. One method that may increase tax efficiency is to simply minimize buying and selling in order to manage your capital gains taxes. The idea is to pursue long-term gains, instead of seeking short-term gains through a series of steady transactions. In the words of Warren Buffett, “Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.”2
Remember, before making any financial decision speaking with a financial or tax professional is a great idea. A financial professional can help you formulate a strategy that incorporates your long-term goals and risk tolerance.
Tax-loss harvesting. Many savvy investors engage in selling certain securities at a loss to counterbalance capital gains. This means the capital losses they incur are applied against their capital gains, which lowers personal tax liability. But remember, you can take up to $3,000 in capital loss each year and can carry losses forward into subsequent ones.3
Assigning investments selectively to tax-deferred and taxable accounts. Another common tactic some investors use over the long run is placing tax-efficient investments into taxable accounts, while also placing less-tax-efficient investments in tax-advantaged accounts. This also depends heavily on how you have your investments allocated. Consulting a financial professional may help you decide if this is a smart move for your particular situation.4
1 - businessdictionary.com/definition/tax-efficiency.html [6/6/2019]
2 - brainyquote.com/quotes/warren_buffett_173492 [6/6/2019]
3 - fmgwebsites.com/mike.woods/resource-center/investment/a-taxing-story-capital-gains-and-losses [6/6/2019]