Abstract
Global tactical asset allocation (GTAA) has rarely been associated with tax-aware investing. Although GTAA can improve returns over a buy-and-hold strategy, more tactical trading (when profitable) typically leads to higher tax bills. If investors are careless about tax management, the GTAA alpha can easily be swamped by increased taxes. In response, many investors have been quick to embrace passive buy-and-hold strategies for which low turnover results in a lower tax bill. However, rather than abandoning GTAA in favor of lower taxes, investors can apply well-documented tax management methods of loss harvesting and tax-lot selection in their tactical trading. The authors show that investors can capture most of the benefits of GTAA, and even provide a boost to their after-tax returns, if they view the proactive management of tax consequences as an important part of the quest for asset allocation alpha.
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