Per the WSJ: John West, co-founder of an investment-advisory firm Flatrock Wealth Partners recently modeled two portfolios to highlight what all investors should be focused on: returns after tax.
One model simulated the typical portfolio of a university endowment (public stocks, bonds and private assets). The second was a simple basket of two stock index funds (60%), and a municipal bond fund (40%).
Fund One: “this simulated endowment portfolio would have returned 8.6% annually, pretax. After federal and state taxes, West estimates, an upper-income investor would have earned only 6.6% annually after tax.”
Fund Two: Earned a nearly identical return pretax, and 8% annually after tax. “Crushing” fund one.
The article continues:
If you think about it, that makes perfect sense.
An index fund holding publicly traded stocks can generate almost no tax bills for as long as you own it, especially if it’s a broadly diversified ETF.
On the other hand, private-credit funds specialize in high-interest loans; many hedge funds trade rapidly, generating short-term capital gains; private-equity funds produce big payouts when they sell portfolio companies. Other alternative strategies, including private real estate, also tend to produce titanic tax bills.
In general, ETFs miniaturize your taxes. Private funds supersize them.
There’s a lot more to consider. Some private funds massively outperform, but the average individual investor is unlikely to be paired with a financial advisor that can consistently identify those funds. There’s also the idea of having these funds in a 401(k). See the link below for the full article.