This grant has produced a paper entitled "Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing" which has been submitted to the Journal of Finance.
The authors demonstrate that investors will locate their equity in a taxable account and hold equity in a tax-deferred account only if they have insufficient capacity to hold the desired amount of equity in a taxable account. In fact, the researchers find that investors may find it optimal to leverage their taxable account to increase their equity exposure there. The advantage of holding equity in the taxable account is due to the low current yield on equity relative to bonds and the tax options resulting from ability to realize losses and defer gains. Their results indicate that investors do not hold equity in a tax-deferred account and bonds (whether taxable or tax-exempt) in a taxable account in an optimal portfolio structure.
Click here to read the article on the findings of this research.
