Taxes are the biggest drag on return that any taxable investor faces. I’ve been doing investing for people who pay taxes since 1992, so maximizing after-tax return has always been at top of mind for me.

I also grew up in a family business observing investors. When preparing thousands of people’s tax returns, I saw that they were making horribly inefficient investment decisions because they were ignoring taxes. As a result, tax-aware investing is one of my core differentiators and an area of expertise I've cultivated for a long time.

Many investment managers claim to seek after-tax return, but their techniques often produce disappointing results, either because the tax burden remains large or because a lot of before-tax return has to be sacrificed to achieve the tax objective. Or both. To achieve better results than that, my firm bases its tax-aware strategies on rigorous academic research and modeling rather than on rules of thumb circulated widely in the media and advertising.

To that end, I recently interviewed Andrew Ang, a leading voice at the nexus of academia and practical finance.

As an academic, Andrew was a chaired professor at Columbia Business School and chair of the finance and economics division at the National Bureau of Economic Research. As a practitioner, he was a managing director at BlackRock, focusing on factor investing, before starting his own firm.

I’ve also done my own research on investing and taxes. I’ll start with that, then bring in Andrew’s work and some other research.

S&P 500 total returns before and after taxes

Most of what is knowable about the future can be teased out of data from the past (although the unknowable part is the most important part). In this spirit, I simulated before- and after-tax total returns on Vanguard’s S&P 500 index fund over the last 50 years (1976-2025), a period that includes both high- and low-tax environments and that consequently may be typical of the next 50 years. To make the analysis doable using Morningstar’s database, I used a single income tax rate (40%) and a single capital gains rate (24%) in all years.[i] (I’ve been performing this analysis multiple times a year for 35 years, which shows you where my head is regarding investing and taxes.) Exhibit 1 shows the results.

Exhibit 1

Growth of $10,000 Before and After Taxes in an S&P 500 Index Fund, August 1976 – July 2025, Assuming 40% Income Tax and 24% Capital Gains Tax Rates

Compounding the tax drag over 50 years, and ignoring tax savings techniques (other than buying and holding the index) that I’d apply to taxable portfolios, the loss from taxation is an incredible 45.4% of the ending pre-tax portfolio value. (This result obtains even though the compound annual return difference looks small on paper, 10.57% versus 11.67%.)

This result is about as good as it gets for most investors, who not only pay these taxes and other costs, but often behave in ways that reduce their return further, such as buying after a large rise in stock prices and selling after a decline.

This math is exactly why active tax management is one of the pillars of what an investor can do to maximize his or her long-term wealth. With tax-aware management and other good investment practices, one should be able to do substantially better than the tax-drag results shown in Exhibit 1 for an S&P index fund buy-and-hold strategy.

An adage that is becoming popular in the investment management industry is that “what matters is not the return your investments earn but how much of that return you get to keep” (Exhibit 2). The market is already a harsh environment — costs, fees, and taxes all act to erode returns — and unnecessary taxes remain one of this industry's most persistent, and most fixable, drags on wealth.

Exhibit 2

Schematic of investment returns before and after costs and harmful behavior

A more detailed study of taxes and investing

My longstanding interest in this issue, and my conviction that it is very important to investors and should be more important to investment managers, motivated me to interview Andrew. The conversation has been circulated as a podcast on The Q Factor and most of the rest of this blog post is a summary of it, enhanced to include some additional ideas and references.

He recently published a very thorough study of taxes and investing (this is a free public download – go for it), using year-by-year tax rates and programming a Form 1040 for each year.[ii]

I began by wondering why there was so little formal work on taxation of investors, and why it took so long for his research to come to the forefront. After all, investment income and capital gains have been taxed in the United States for 113 years, for most of that time at rates higher than today’s. Surely, I asked, investors were chomping at the bit for information on how to keep more of their hard-earned gains!

The long wait, Ang’s paper suggests, was because there is an incredibly large number of moving parts, including changing tax rates, the changing income structure of the investor population, progressive taxation so there are different tax brackets, different tax rates for dividends and capital gains, and wide variation in the apportionment of investment return between dividends and capital gains. A study at the level of detail he thought appropriate (and publishable) required considerable computing power and analytical resources, all of which are more readily available at scale today.

My own studies over the last 35 years, enabled by Morningstar, Ibbotson, and other data and software, used simplifying assumptions that eliminated most of the moving parts. The results are correct in terms of direction and order of magnitude, but it is nice to have the more rigorously obtained results available.

Ang gave the great financial journalist Jason Zweig partial credit for motivating this study. In a November 2024 speech to CFA Society New York, Zweig called the total return on equities as publicized by Roger Ibbotson, Jeremy Siegel, and others “the return nobody got.” [iii] Zweig is correct that no actual investor can earn the exact total return on a market index, because all investors face at least some costs. But, with fees and transaction costs on all types of funds heading downward, taxes emerge as by far the largest decrement to returns that most investors will ever face.

Andrew Ang’s take on the size of the tax drag

Ang found that, for a high-income investor in the recent low-tax period 1996-2025, taxes reduced the return on an equity portfolio by 1.65 percentage points per year (compounded), or about 16% of the 10.54% compound annual total return on the S&P 500 over that period. Taxes and other costs compound downward, so a dollar invested in the S&P total return index at the end of 1995 grew to $17.04 by year-end 2025 before taxes, but only $10.83 after taxes. That’s a 36.4% tax hit! You might not think a 1.65 percentage point difference in the annual rate of return would compound to such a big loss, but it does.

This result is for an index-like portfolio that was not managed in a tax-aware manner. Despite the lower-tax environment in the period Ang studied, the tax drag he found was larger (measured as an annual rate) than in the 50-year period that I studied. The chief reason for this difference was that Ang assumed the investor was earning, and paying taxes on, $750,000 per year in 2025 dollars, which is a top-tax-bracket income.

But Ang’s paper is not the first such study. My colleague Larry Siegel, who is a senior advisor to Quent and who has been deeply involved with Roger Ibbotson’s Stocks, Bonds, Bills, and Inflation studies on and off for 50 years, wrote a paper with David Montgomery in 1994 that used a quick-and-dirty approach to shortcut around all these subtleties.[iv] To tie their paper to Ibbotson’s work, they called it “Stocks, Bonds, and Bills After Inflation and Taxes.” They found that, over 1926-1993, a period with much higher average tax rates than Ang’s 1996-2025 time window, the tax drag was 260 basis points per year.[v] So each of the three studies confirms that the order of magnitude found by the others is roughly correct.

Dividends historically drove much of the tax damage

Ang pointed out that his historical study of investment taxation overstates the damage from taxes in today’s environment. Dividends have typically been taxed at ordinary income rates, which are higher – sometimes much higher – than capital gains taxes. Combined with the fact that dividend yields used to be much fatter (4.5% on average over 1926-1995) and are now extraordinarily skinny (1.2% in 2025), the dividend tax is a less important part of overall tax drag than in earlier years. Today, qualified dividends and long-term capital gains are taxed at lower rates (20% + 3.8% NIIT),[vi] but capital gains are still preferable from a tax viewpoint because such gains can be deferred indefinitely, sometimes until after death.

Exhibit 3 shows the apportionment of the tax drag between capital gains and dividends over the low-tax-rate 1996-2025 period. The dollar amounts are based on Ang’s assumed starting capital of $474,600 at year-end 1995 (equal to $1 million in today’s money). Considering the low dividend yields that prevailed during the period, the dividend portion of the tax paid is surprisingly large. The reasons are (1) the higher (ordinary income) tax rate applied to nonqualified dividends, and (2) the fact that taxes on dividends need to be paid immediately while capital gains taxes are deferred until the asset is sold. In addition, an allowance is made for the possibility that, due to death of the investor, the tax will never be paid. I turn now to this latter issue.

Exhibit 3

Cumulative Tax Payments by Type, 1996-2025, Based on Ang’s (2026) Assumptions and a $474,600 Starting Investment

Source: Ang (2026). Reprinted by permission.

Death and taxes

Benjamin Franklin said that nothing is certain except for death and taxes, yet the U.S. tax code as currently configured makes death a highly efficient way to dodge taxes. (Despite this, I don’t recommend rushing it.) Embedded capital-gains tax liabilities disappear on death due to the step-up in cost basis that occurs when an investment is inherited by one’s child or other heir.

In a landmark article in the Journal of Portfolio Management, James P. Garland, a family office executive, quantified this tax benefit (Garland 1987).[vii] Using mortality tables, Garland estimated that the present value of this benefit becomes material around age 55 for men and 60 for women. Ang worked the Garland calculations into his entire analysis, making the present value of the tax benefit into a balance sheet item (speaking figuratively) that increases in value over time, from a modest amount for a very young investor to a large amount for an old one. Ang estimates that the value of the “death put option” starts out at 24% of the liability’s face value for a 30-year-old woman and 28% for a 30-year-old man, and crosses 50% of the deferred liability's face value around age 55–56 for men and 59–60 for women. By age 70, factoring this in cuts the annual tax drag from 1.65 percentage points to about 1.03–1.04 percentage points.

Wag the dog

Investors, Ang said, should still never let the “tax tail wag the dog”—that is, cause tax minimization to override all other investment considerations. This is good advice but not everywhere and always. There are some portfolios that are efficient for tax-exempt investors that are inefficient for taxable investors, and vice versa. Taxable investors should generally avoid dividend-paying, or at least high-dividend-yield, stocks in a taxable account; if you overweight growth stocks relative to value, using (for example) the price-to-book ratio, you’ll get a result something like this. Instead, put dividend-paying stocks in retirement accounts where the tax is deferred until withdrawal (or disappears upon death of the account holder). Another example, supported by Ang’s research as well as my own, is tilting toward small-cap companies, which tend to pay less in dividends and more in capital gains.

Tax considerations can be relevant to asset-location decisions—that is, deciding which investments may be held in taxable, tax-deferred, or tax-free accounts. However, there is no one-size-fits-all approach. The appropriate analysis depends on an investor’s tax situation, objectives, investment horizon, account types, portfolio composition, and other circumstances. Tax considerations should be evaluated alongside, rather than allowed to override, the investor’s broader investment plan and risk considerations.

Bottom line:

A retirement account is a tax shelter, as is a portfolio of growth stocks. Put the growth stocks in your taxable account instead.

Asset location

While it’s well known that most of the return difference across portfolio results is attributable to asset-class allocation (and sticking with it) (Brinson, Hood, and Beebower 1986 or BHB), taxable investors need to be just as aware of asset location – that is, in what type of account (fully taxable, IRA, Roth, etc.) an asset should be held. Ang said, “I think the individual counterpart to BHB is that the asset allocation and account or tax location decisions, combined, are going to drive...90 to 95 percent of the returns for individuals.”

I met Gil Beebower, a co-author of the BHB study, in the mid-1990s and he talked about the result as if it was no big deal. It isn’t, because what he found was that the asset-class mix explained 90% of the difference in return variance from one portfolio to another – a difference that few people care about and that has nothing to do with the percentage of return that is explained by asset allocation.[viii] But, as Beebower complained to me, the whole industry explained it the wrong way, saying that asset allocation was shown to be responsible for 90% of the return – a misunderstanding that, ironically, caused his paper to have a huge impact, much bigger than justified by the actual finding.

Applying Andrew Ang’s research

Ang has also applied these concepts in his investment-management work, with an emphasis on tax-aware implementation and the role of intangible business assets in company valuation. His research provides a useful framework for considering how taxes may affect long-term investment outcomes.

Consistent with today’s economy-wide emphasis on intangible assets, Ang’s uses valuation techniques focused on “things that are valuable for a company but not necessarily reflected on the balance sheet: distribution networks, patents, proprietary IP, access to customers, and product design.” This approach is consistent with what we do at Quent.[ix]

The bottom line: Avoid all unnecessary taxes and costs

However we slice it – by time period, tax bracket, investment strategy – Ang, Siegel and Montgomery, and I, as well as other researchers – all agree that we give up between 1% and 5% of investor wealth each year to taxes. To succeed in taxable investing, an investor has to avoid the taxes that can be avoided and defer the taxes that can be deferred. That means treating tax management as an active discipline rather than a once-a-year afterthought — a portfolio manager who doesn't focus on the tax effects of every decision is, in effect, passive with respect to tax management. (Exhibit 1 showed what damage passive tax management can do – it’s not good.) We work to be active with respect to taxes, not just investment choices.

Done well and consistently, the returns from tax-aware investing add up. Research and our own experience both point to a similar range: careful, systematic tax management can improve after-tax returns by roughly 1 to 3 percent a year on average*, with much of the benefit showing up in the early years — gains that compound right alongside the market itself. These results are consistent with Andrew Ang’s, and those of Siegel and Montgomery, and my own. As you can see, I’ve been thinking about these issues carefully for decades, as have my academic collaborators and the other well-known researchers cited above.

To sum up, the single most powerful decision an investor can make is to invest as much as possible and keep it invested. Taxes, costs, and behavioral considerations are second-order effects. But these second-order effects are all negative and can add up to big money, so investors should be hyper-aware of them. In other words, investors should seek to maximize the part of the return they get to keep. That means controlling costs and behaving like truly long-term investors, not just avoiding unnecessary taxes. But taxes are almost always the biggest cost, so that is the place to start. Or, as Andrew Ang put it in an e-mail to me:

Endnotes

[i] Because the analysis using Morningstar data and software required me to use a single tax rate for a diverse population of investors, I used the 40% and 24% rates as a “not too bad” approximation. Some investors may pay as much as a 50% marginal rate in combined federal, state and local taxes on dividends; other taxable investors pay as little as 15 or 20%. The 50% taxpayer should care more about taxes than I suggest, and the 20% taxpayer should care somewhat less.

[ii] Ang, Andrew. 2026. “Uncle Sam’s Cut: A Century of the Federal Tax Drag on US Equity Returns.” Version of May 29, 2026. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6847621.

[iii] Drawing on Zweig’s work, the CFA Institute Research Foundation author Paul McCaffrey recycled the phrase into his 2026 paper, “Stocks for the Long Run Revisited: Dividends and ‘The Return Nobody Got,’” which is very much worth reading.

[iv] Siegel, Laurence B., and David Montgomery. “Stocks, Bonds, and Bills after Taxes and Inflation.” 1995. Journal of Portfolio Management 21:2 (Winter), pp. 17–25. Siegel was Roger Ibbotson’s first employee, in 1979. Siegel and Montgomery were both managing directors of Ibbotson Associates when the 1995 paper was written.

[v] Some of the moderation in Siegel and Montgomery’s result comes from them using a hypothetical taxpayer with a much lower income, $75,000 per year in 1995 dollars, than Ang used; that is $158,333 in today’s (year-end 2025) money. Ang’s taxpayer earns $750,000 in today’s money. Ang did this to capture the high tax brackets that most people interested in this topic are in. For any given investor, tax rates could be higher or lower (and would include state taxes in some states).

[vi] Net Investment Income Tax (NIIT) is a 3.8% surtax on investment returns (other than unrealized capital gains) that applies to married taxpayers filing jointly with incomes over $250,000 and to single taxpayers with incomes over $200,000 – thus to most people with substantial portfolios.

[vii] Garland, James P. 1987. “Taxable Portfolios: Value and Performance.” Journal of Portfolio Management 13 (2): 19-24.

[viii] Finally, in 2000, Roger Ibbotson and Paul Kaplan, in a Financial Analysts Journal article entitled “Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?” (volume 56, issue 1, pp. 26-33), got it right and won a Graham and Dodd Award for it.

[ix]See the following Quent Capital publications and interviews:

How the Once “Unmeasurable” is Driving Small Cap Growth

The End of Accounting and the Rise of Intangibles

Baruch Lev: The End of Accounting

Ethan Rouen: Quantifying Human Capital

Disclosure

*The studies discussed above illustrate that taxes can materially affect long-term after-tax wealth and that thoughtful tax management may be valuable in appropriate circumstances. The potential benefit, however, varies materially based on each investor’s circumstances, market conditions, portfolio activity, tax rates, account type, and implementation. Tax-aware investing cannot eliminate taxes or assure improved investment results.

This material is for informational and educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security, investment product, or investment advisory service. The views expressed reflect Quent Capital’s opinions as of the date of publication and are subject to change without notice.

This material should not be construed as personalized investment, legal, tax, or accounting advice, or as a recommendation to buy, sell, hold, or avoid any security, sector, asset class, investment strategy, or investment product. References to indexes, investment approaches, asset classes, securities, or tax-management techniques are for illustrative purposes only and should not be interpreted as a recommendation or endorsement. Tax laws, tax rates, and individual circumstances vary and may change. Readers should consult their own tax, legal, and financial advisers regarding their particular circumstances.

The illustrations and analyses discussed herein are hypothetical, are based on stated assumptions, and are not indicative of actual client results or future performance. Actual results will vary, potentially materially, based on, among other things, an investor’s tax circumstances, holdings, investment activity, account type, tax rates, market conditions, transaction costs, fees, and the timing of gains and losses. There can be no assurance that tax-aware investing or any investment strategy will reduce taxes, improve after-tax returns, be profitable, or achieve its objectives.

Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. Indexes are unmanaged, cannot be invested in directly, and do not reflect the deduction of advisory fees, transaction costs, taxes, or other expenses.

Information from third-party sources is believed to be reliable but is not guaranteed as to accuracy or completeness. Quent Capital does not undertake to update any information contained herein.

Quent Capital, LLC is an SEC-registered investment adviser. Registration does not imply any level of skill or training. For additional information regarding Quent Capital’s services, fees, and conflicts of interest, please review Quent Capital’s Form ADV Part 2A and related disclosures available on the firm’s website.