The New York Times published a report on the failure of active management in an article titled, “How Many Mutual Funds Routinely Rout the Market? Zero.” We’re not at all shocked to see their results.

Nobel laureate, Daniel Kahneman, voiced his sentiment on the same topic recently at a speech in New York, saying that he didn’t want any active management in his own investment portfolio. Interestingly, his audience at this particular conference was made up of active managers.

One thing is certain when it comes to investing, taxes make a big difference in after-tax returns.

A recent article in The Wall Street Journal, “Individual Stocks vs. Index Funds: The Next Frontier,” discussed direct indexing as an advanced technique to potentially save on capital gains taxes. Instead of owning a single investment representing a sector or asset class, direct indexing means buying the hundreds or thousands of stocks individually that make up that asset class. While it’s a useful technique to aggressively harvest tax losses, the complexity involved is likely too much for most investors.

Carolyn Geer with the WSJ quotes Fran Kinniry, investment strategist for the Vanguard Group, as saying that “most investors would be better off simply holding tax-efficient investments, such as broad-market index funds and municipal-bond funds, in taxable accounts, and holding tax-inefficient investments, such as taxable bonds, in 401(k)s and individual retirement accounts.”

At Hill Investment Group, we agree. Here are our three main strategies to help increase after-tax returns:

• Optimizing asset location (as previously mentioned here)
• Tax-loss harvesting
• Using low turnover investments and tax-managed funds

According to Vanguard research, the first category alone can add up to 0.75% in annual returns, depending on the mix of investments.

Ending a relationship with a prior advisor can be difficult, but you can make the conversation much easier by preparing yourself with the appropriate things to say. Click here to see our template letter.