Abstract
The authors imagine an individual investor who follows the approach described in her 401(k) participant education materials and invests in a well-diversified portfolio in her tax-deferred retirement account. The same investor hires the services of a financial advisor who encourages her to employ a well-diversified-strategy in the management of her taxable savings portfolio. Each of these strategies considered in isolation, could represent an intelligent, even optimal allocation for the investor. Yet, considering the different tax treatment of the returns in the two portfolios, it is almost certainly sub-optimal to have such well-diversified segments within the investor9s total portfolio. This article contrasts a total portfolio approach to an asset allocation problem, when some part of the portfolio is taxable, to the more conventional approach of treating the two portfolio segments separately. It also illustrates the difference in the resulting allocations and risks for the two approaches.
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