“…but in this world, nothing can be said to be certain, except death and taxes.” ― Benjamin Franklin

In our approach to investing, the “tax tail” does not wag the “investment dog”, meaning that we begin our approach to investing with our philosophy (applying active risk management to economically-balanced portfolios using non-correlated asset classes) and then seek out the most reliable, cost effective, AND tax efficient strategy to implement that philosophy.

In doing so, here are some brief comments on the tax implications of our approach:

  • Fund Selection: Because we use passively managed/index funds (instead of actively managed funds), not only are the fund expenses quite low, but because there is very little turnover in the funds themselves, they are tax-efficient by design.
  • Portfolio Turnover: Additionally, our approach is tax-efficient in that it does not involve the frequent changing of the individual funds/positions in our portfolios.  When we do make a change, it will most likely result in a long-term capital gain (versus a short-term gain which is taxed at a higher rate).
  • Taxable vs. Tax-Free Bonds: We do not use tax-free bonds in our standard portfolios for a couple of reasons.  First, we find that the after-tax equivalent yields/returns of the two are mostly the same – even for investors in the highest tax brackets.  Also, our investment strategy depends on the way our bond positions correlate to our stock positions, as well as how they respond in different parts of the economic cycle.  Tax-free bonds are not as reliable as taxable bonds in this way.
  • Model Changes: Although the outlook of our BCM Market Risk Model does not change often, when it does it necessitates a tactical move involving some of our positions (not all of them) where we may realize significant long-term capital gains.  While this will lead to a higher tax bill in the year in which it occurs, adhering to the readings of our Market Risk Model is an essential part of our risk-managed approach to investing.  We are willing to incur a long-term capital gain tax liability in order to protect against an asset depletion.

So, while Ben is correct about the inevitability of taxes, we will always look for ways to be tax efficient as we adhere to our investment philosophy and strategy.

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About the Author

George Holland joined Billeaud Capital Management in 2009. Since entering the investment advisory business in 1989, George has provided independent investment and financial advisory services to individual clients, as well as holding management positions at an independent trust company, a broker dealer/investment advisory firm, and running his own investment advisory business. George earned a B.A. degree in Economics and a Masters in Business Administration from Louisiana State University…. Read more.