A high-growth stock fund holds stocks selected for comparatively high expected future growth. Its tax efficiency depends not only on returns and distributions, but also on investor tax rates and portfolio turnover. section 8.2
Table 8.3 Typical attributes of various assets
| Type of asset | Average return | Payout rate | Tax rate payout | Turnover rate |
| Large-cap stocks | 8% | 1.5% | 0.2 | 0 |
| High-growth stocks | 9.5% | 1.5% | 0.2 | 0 |
| International stocks | 8% | 1.5% | 0.25 | 0 |
| REITs | 8% | 4.5% | 0.35 | 0 |
| Money market fund | 3% | 3% | 0.35 | 0 |
| Government bonds | 4% | 4% | 0.35 | 0 |
| High-yield bonds | 7.5% | 5.5% | 0.35 | 0 |
| Municipal bonds | 2.5% | 2% | 0 | 0 |
| Large-cap,high-turnover stocks | 8% | 1.5% | 0.2 | 0.2 |
| High-growth,high-turnover stocks | 9.5% | 1.5% | 0.2 | 0.2 |
Compare the fund with other assets using assumed average return, payout rate, payout tax rate, and turnover. section 8.2
Evaluate the fund’s tax-location trade-offs:
- With a 1.5% payout and no turnover, the fund is modeled like large-cap stocks but with a 1.5-percentage-point higher average return; this makes it significantly more tax-efficient in the comparison. section 8.2
- Adding 20% turnover reverses the result: the fund moves from the most tax-efficient asset to the most tax-inefficient asset. section 8.2
- A small 4% turnover rate can place the fund near the middle of the tax-efficiency range, as higher returns and favorable capital-gains taxation offset the tax cost of turnover. section 8.3.1
Three accounts, three assets
Suppose an investor has $1.5 million divided equally among an IRA, a taxable account, and a Roth, and wants equal $500,000 allocations to large-cap stocks, high-yield bonds, and a high-growth stock fund with 4% turnover. Comparing all six assignments identifies the high-growth fund as the best Roth placement in this case, because its higher returns and low capital-gains rate are balanced by turnover-related tax inefficiency. section 8.3.1
