You Can Spare Your Returns the Tax Ax

Bonds are the new stocks. Real estate is the new technology. Investors frequently go in and out of sectors as if it were fashion. But one area of investing that's tragically (and perennially) un-hip is the idea of tax management.

And just like the fashion victims who spend way too much money only to end up looking foolish, investors chasing trends ignore what might be the single most important guarantee of better-than-average returns: tax efficiency. A new study by Lipper, a Reuters company, shows that investors needlessly give up as much as 23% of returns to taxes.

The study is the first based on the disclosure requirements of the Mutual Fund Tax Awareness Act, which was passed in 2000 but only recently enacted. As of February 2002, all mutual fund prospectuses (except those for money market funds) must report after-tax returns. The results were surprising.

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