Determinants of Portfolio Performance After Taxes

Academics and practitioners continue to debate the relative importance of asset allocation versus security selection in determining portfolio performance, often focusing on pre-tax returns. While both asset allocation and security selection shape pre-tax performance, after-tax returns ultimately matter more to investors, as they reflect the wealth retained after taxes. However, there is no consensus on the optimal asset location strategy to maximize after-tax returns. This study presents a framework for asset location, leveraging Monte Carlo simulations to determine the <italic>indifference threshold tax rate (ITTR)</italic>, which quantifies the tax sensitivity of each asset class.