11. Portfolio Optimization: The Impact of Taxation, Turnover, and Time Horizon on Net Returns

In this chapter we share the after-tax return of the S&P 500 since its inception. The annualized, after-tax return for a high net worth investor who began investing in 1957 and who liquidated her portfolio on December 31, 2017, was 7.36%. The model also took into account the impact of state taxation. The main objective of the chapter was not only to calculate the after-tax return on equities, but also to compare stock and bond returns on a net basis. Thus, we were trying to observe the after-tax equity risk premium (or lack of risk premium) that was available to investors throughout the period. We supposed (when we began the study) that there were times when bonds outperformed equities on a net basis. That supposition turned out to be correct.