n investing, it is only what you keep that counts. A 2010 study by Lipper, Inc. showed that owners of mutual funds in taxable accounts gave up an average of 0.98 to 2.08 percent in annual return to taxes over the last 10 years. Given that inflation adjusted pre-tax returns have historically been close to 7 percent, this implies sacrificing up to a quarter of your return and severely limiting your spending power in retirement.\r\n\r\nGranted, mutual funds are among the most tax inefficient forms of investing, but most \u201cdo it yourself\u201d investors do a relatively poor job of minimizing the impact of tax on their portfolios regardless of the tools they use. Meanwhile, most investment managers place a relatively low priority on tax minimization because either they don\u2019t have the capability to handle it effectively or they assume clients will not focus on it.\r\n\r\nTax management can be tricky, but all investors can benefit by focusing on the following three areas:\r\n\r\n \tAvoid short term gains. This is the easiest one to get right. It almost never makes sense to take meaningful short term gains. Assume a stock purchased for $10,000 six months ago is up 50 percent and is now worth $15,000. If your marginal income tax rate is 35 percent, selling the stock could mean a tax bill of $1,750. On the other hand, waiting until the stock goes long term would reduce the tax liability to $750, at current rates. The $1,000 difference is 10 percent of the original position. Predicting stock movements is very tough, so taking a known $1,000 tax loss just based on a hunch is rarely smart.\r\n\r\n\r\n \tHarvest losses. When individual stocks do well, they become larger as a percentage of the portfolio. This creates more risk. It is difficult to balance the need to reduce risk and the desire to defer tax payments. This is where our correlation driven software helps us. But a simple technique that almost everyone can use is to proactively harvest available losses to offset gains. Where acceptable alternatives exist, it often makes sense to sell a position that is underwater solely to utilize the loss to offset gains realized by selling a winner. Once again, the known benefits of risk reduction and tax avoidance often justify the unknown benefit of hoping for a rebound in the stock that is down.\r\n\r\n\r\n \tAllocate smartly across accounts. Many investors have both taxable and tax-deferred (retirement) accounts. Except Roth accounts, all eventually will owe taxes, but the structure makes a big difference in long term wealth. As a general rule, high yield income producing assets such as bonds should usually be held in tax deferred accounts. Imagine owning $10,000 each of only two assets - a growth stock with no dividend that grows at 8 percent, and a bond held to maturity with a 5 percent yield. Fast-forward twenty years and assume a 25 percent tax rate in withdrawals from the retirement account. The after tax value with the stock in the taxable account is just over $59,000. However, if the bond is held in the taxable account, because the taxes paid each year on the interest don\u2019t have a chance to grow, the after tax value falls to about $54,000. This represents nearly a 10 percent difference in total wealth.\r\n\r\nMost investing mistakes are made when people get emotional, becoming overconfident about the future direction of specific investments. Often, gains should be realized, but only for a good reason.\r\n\r\nOne suggestion: before you decide on a potential trade or set of trades, pretend you would have to pay the taxes now. A lot of people don\u2019t worry about taxes because the payment next April seems far away and arbitrary. If you had to write the tax check right now, and you still want to do the trade, it is much more likely to be a good trade.