PORTAX After-Tax Portfolio Analysis

Investor portfolios often have a few low cost basis assets.  These are long term holdings with low turnover that may represent a significant portion of a portfolio’s market value.  As a large individual holding, a low cost basis asset can create excessive portfolio risk.  However, ignoring tax consequences when diversifying can be costly.

The graph to the right shows three different strategies: Do Nothing, Diversify and Tax Plan.  The initial portfolio value is $10 million with a $4 million Low Cost Basis asset.  The investment horizon is 10 years.  The Diversify strategy simply minimizes portfolio risk at the same return target as the Do Nothing strategy.  The Tax Plan strategy instead matches the Do Nothing strategy after-tax performance by targeting the same Ending Value in year 10 while reducing both the portfolio risk and the concentrated position in the Low Cost Basis asset.

The corresponding table to the right shows that the Tax Plan strategy outperforms the Diversify strategy by $1.8 million at a cost of 2.1% in portfolio risk.