Appendix A RAC

Card Sorting | Design Research Techniques

Date of publication: 2017-08-09 04:26

The chart below summarizes these interactions. Note that this section does not consider tax treatment for those in a marginal tax bracket of 65% and below. These taxpayers are addressed in 8775 Special Considerations. 8776

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Chart-based : This method simply tallies behaviours on a chart, often in conjunction with time data, rather than locating them on a map of the environment. Useful when features of the environment are not the primary focus.

Research from Timothy A. Judge and Daniel M. Cable

Our estimates of the annualized benefit range from % to %, depending on assumptions described below. For a typical customer saving in taxable, tax-deferred, and tax-exempt accounts over 85 years, we estimate the annualized benefit across the entire portfolio to be %. This equates to 65% more after-tax return available in retirement.

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The full optimization on an actual set of accounts must solve for hundreds of variables subject to hundreds of constraints, and reproducing the full objective function would take many pages. Good news! The computer will do it. Even better news: Because the calculation is automated, it can run every time any of our constants or constraints change, using every opportunity to either maintain, or move closer to the optimal asset location.

Furthermore, stocks do generate some return via dividends. The expected dividend yield varies with more granularity. Small cap stocks pay relatively little (these are growth companies that tend to reinvest any profits back into the business) whereas large cap stocks pay more (as these are mature companies that tend to distribute profits). Depending on the interest rate environment, stock dividends can exceed those paid by bonds.

Clearly, a TEA is the most favorably taxed account. Conventional wisdom thus suggests that if a TEA is available, we use it to first place the least tax-efficient assets. But that approach is wrong.

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In this paper, we discuss the various factors that must be considered by an optimal asset location strategy. We then present the methodology behind TCP, as well as results from performance simulations.

Asset location represents one of those unique 8775 free lunch 8776 opportunities for wealth creation—a mechanism by which investment strategies that are already being implemented can simply be done in a more tax-efficient manner that maximizes long-term wealth creation. Yet in practice, the idea of a 8775 free 8776 lunch for asset location may be slightly overstated, in that the complexity of implementing it effectively requires more work, with a far more intensive and proactive process to evaluate investments for their prospective return and tax-efficiency characteristics, establish an asset location priority list to be utilized, and then actually implement it—ostensibly with the assistance of rebalancing/trading software—on an ongoing basis. 7

79 Since inception, Betterment has never displayed daily performance of individual ETFs in a portfolio, and has generally de-emphasized daily performance of a portfolio, since focusing on short-term volatility is not productive, and instead increases the probability of suboptimal investor behavior. Instead, the interface was designed to emphasize information that an investor can and should act on—such as an indication of whether the portfolio is on track to reaching its specified goal, and if not, what can be done to put it back on track.

With linear optimization, our preferences can be expressed through additional constraints, weaving these considerations into the overall problem. When solving for new cash flows, TCP penalizes allocation drift higher than it does location drift—another complexity not represented by the simplified objective function above.

The easiest way to determine 8775 what goes where 8776 is to have confidence that at least with respect to certain assets, 8775 this goes there first. 8776 Armed with such conviction, the casual locator can start 8775 filling up 8776 the qualified account, prioritizing those assets which are perceived to benefit most from sheltering. Moving down the list requires only basic arithmetic—subtract the dollar amount allocated to an asset from the available balance, look to the next asset, and repeat until the qualified account is full (and what’s left goes in the taxable).

An investment strategy intended to maximize the after-tax value of a portfolio should focus on increasing annualized after-tax return. Traditional approaches to asset location are concerned with prioritizing assets in certain accounts based on their relative 8775 tax efficiency 8776 , with the objective of sheltering income from annual tax.

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