Implications of principal, risk, and returns sharing across savings vehicles

Abstract

This study illustrates that the choice of savings vehicles [e.g., taxable account, Roth IRA, or tax-deferred accounts such as a 40l(k)] affects the portions of principal effectively owned by, returns received by, and risk borne by individual investors. This study examines the implications of this analysis for (I) the calculation of an individual's asset allocation, (2) mean-variance optimizations, and (3) asset location. For example, it illustrates problems when traditional mean-variance optimiza­tion is applied to an individual's portfolio. Separately, there is broad agreement among scholars that we should distinguish between pretax funds and after-tax funds when calculating an individual's asset allocation. This study suggests an approach to measuring an individual's asset allocation.