In our analy­sis com­par­ing after tax per­for­mance of a 3 factor man­aged port­fo­lio ver­sus other investment advis­ors as well as self-directed investors, we used his­tor­i­cal data from Feb­ru­ary 1997 through Feb­ru­ary 2012, and made the fol­low­ing assumptions:

– Each port­fo­lio begins with a $750k tax­able account and a $250K IRA.

– Each year $20K is added to the tax­able account and $5K is added to the IRA.

– Both advi­sors and self-directed investors per­form quar­terly re-bal­anc­ing and one time opti­mal asset location.

– The 3 factor man­aged port­fo­lio includes the ben­e­fits of thresh­old-based oppor­tunis­tic re-bal­anc­ing with a tol­er­ance band of 20%, tax advan­taged rebal­anc­ing (spe­cific lot account­ing, whole port­fo­lio re-bal­anc­ing) and tax loss harvesting.

– The self-directed investor employs mostly Van­guard funds, whereas other advi­sors and 3 factor use a com­bi­na­tion of DFA and Van­guard Funds.

– The glob­ally diver­si­fied allo­ca­tion has 60% equity and 40% in fixed income. Within equi­ties, 55% is US mar­kets, 30% is inter­na­tional devel­oped mar­kets, 10% is inter­na­tional emerg­ing mar­kets, and 5% is in real estate invest­ment trusts (REITs). When pos­si­ble, US and Devel­oped equi­ties are dis­trib­uted between Large, Large-Value, Small and Small-Value funds. The fixed income allo­ca­tion is divided equally between inter­me­di­ate US and global treasuries.

– 3 factor‘s fee is 0.50% up to $3M and then 0.35%, for amounts over $3M.  The fee for other advi­sors is assumed to be as fol­lows: the first $500k is 90 BP; the next $500k is 75 BP; the next $1M is 60 BP; the next $2M is 45 BP; the next $2M is 30 BP; the next $4M is 25 BP; addi­tional assets is 20 BP.

– Weekly clos­ing prices and div­i­dend dis­tri­b­u­tions are based on that reported by Yahoo Finance. We used Dimen­sional Fund Advisor‘s 2010 tax data for the break­down of div­i­dend dis­tri­b­u­tions (qual­i­fied ver­sus non-qualified div­i­dend) and pro­por­tion of income tax-free at the state level. We assumed that this data is the same for all funds in sim­i­lar assets classes.

– Taxes were cal­cu­lated assum­ing the investor is in the high­est tax bracket for a Cal­i­for­nia res­i­dent, and paid each April for the prior year plus an addi­tional tax pay­ment for the final par­tial year.

– Taxes and adviser fees were paid via reduc­ing shares of secu­ri­ties in the tax­able account; we assume that most investors pay their taxes via other cash sources, so we did not include in our analy­sis any sales trans­ac­tions asso­ci­ated with these payments.

– For tax loss har­vest­ing prox­ies, we used a vir­tual secu­rity with the exact same per­for­mance char­ac­ter­is­tics as the orig­i­nal secu­rity. Thus we assume that 1) there are appro­pri­ate prox­ies avail­able and 2) that the behav­ior on aver­age over a long time hori­zon of such secu­ri­ties would be very sim­i­lar to the loss secu­rity. If these assump­tions were false, then the advan­tage of tax loss har­vest­ing would be low­ered or elim­i­nated. For this analy­sis, the 3 factor Engine™ was con­fig­ured to only take losses greater than 3% and whose dol­lar value exceeds $5K. Click here to review tax loss har­vest­ing risks.

Spe­cific fund rep­re­sen­ta­tion of asset classes is as follows:

Asset Class 3 factor and other advisers Self-directed investor
US Large Cap Van­guard Index Trust 500 Van­guard Index Trust 500
US Large Cap Value DFA US Large Cap Value Port­fo­lio Class I Van­guard Value Index
US Small Cap DFA US Small Cap Port­fo­lio Class I Van­guard Small Cap Index
US Small Cap Value DFA US Small Cap Value I
Devel­oped Large Cap DFA Large Cap Inter­na­tional Port­fo­lio Class I Fidelity Diver­si­fied International
Devel­oped Large Cap Value DFA Inter­na­tional Value Port­fo­lio Class I Van­guard Inter­na­tional Value
Devel­oped Small Cap DFA Inter­na­tional Small Com­pany Port­fo­lio Class I
Devel­oped Small Cap Value DFA Inter­na­tional Small Cap Value Port­fo­lio Class I
Emerg­ing Large Cap DFA Emerg­ing Mar­kets Port­fo­lio Class I Van­guard Emerg­ing Mkts Stock
US REIT DFA Real Estate Secu­ri­ties Port­fo­lio Class I Van­guard REIT Index
US REIT DFA Real Estate Secu­ri­ties Port­fo­lio Class I Van­guard REIT Index
US Fixed Income Inter­me­di­ate Term High Quality DFA Inter­me­di­ate Gov­ern­ment Fixed Income Port­fo­lio Class I *DFA Inter­me­di­ate Gov­ern­ment Fixed Income Port­fo­lio Class I
Global Fixed Income Inter­me­di­ate Term Medium Quality DFA Five-Year Global Fixed Income Port­fo­lio Class I *DFA Five-Year Global Fixed Income Port­fo­lio Class I

Notes:

Van­guard funds refer to investor shares unless oth­er­wise noted.
* These funds were used to enable a 15-year com­par­i­son. Self-directed investors do not have access to DFA funds.

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(1) Analy­sis com­par­ing after tax per­for­mance of other advi­sors (or a self-managed, sophis­ti­cated investor) to 3 factor based on a glob­ally diver­si­fied port­fo­lio with a 60% equity, 40% fixed income allo­ca­tion. Ini­tial port­fo­lio val­ues assume the fol­low­ing: (a) $750 tax­able and $250k IRA with yearly addi­tions of $20k to tax­able account and $5k to IRA. (b)Taxes deducted via shares each April, assum­ing the high­est tax bracket for a Cal­i­for­nia investor. 

Past per­for­mance is not a pre­dic­tor of future performance.

3 factor has con­ducted exten­sive analy­sis con­cern­ing port­fo­lio per­for­mance. See “3 factor’s Method­ol­ogy and Invest­ment Risks” for details and dis­claimers regard­ing our state­ments con­cern­ing per­for­mance, and the var­i­ous assump­tions we have made in our analysis.