benefits of the core and satellite approach. We required that equal amounts be invested in the core index and the aggressive satellites. Figure 32.3 shows the new efficient frontier. Table 32.6 shows the asset allocation and location results for the 8 percent volatility solution, comparing the uniform equity struture to the core and satellite equity portfolio structure. The ideal mix includes using the tax-efficient core in Mr. Smith's personal account and the higher-yielding but tax-inefficient satellite strategies in the tax-advantaged entities. This arrangement allows Mr. Smith to retain, for his foundation, 100 percent of any excess return generated by active portfolio management. Switching to the core and satellite equity structure increased the expected real value of the foundation from $223.9 to $225.7 million without increasing expected risk. We assumed that the core portfolio was a simple buy-and-hold index strategy. The after-tax return of the index strategy can be enhanced with a systematic tax loss harvesting strategy. Tax loss harvesting takes advantage of flexibility in the tax code. The investor decides whether and when to sell a stock. Thus, the investor can decide whether to realize a gain or a loss. Stocks tend to appreciate over time, so a buy-and-hold strategy is effective at deferring capital gains taxes on the appreciation. A more effective utilization of this flexibility is to realize losses and not realize gains. For example, Mr. Smith will implement his core portfolio strategy by purchasing a diversified portfolio of 250 stocks. Eleven months later he looks at the portfolio: 150 stocks have risen in value, 25 are about unchanged, and 75 have declined in value. The decliners are down by an average of 20 percent. The unrealized loss is equal to 6 percent of the total portfolio value. Mr. Smith also owns several hedge funds. 15% 5% 10% Annualized Volatility Core & Satellite Optimized Location Estate Planning No Estate Planning FIGURE 32.3 Mr. Smith's Efficient Frontier: Expected Real Value of the Foundation in 15 Years Net of Income and Transfer Taxes