portfolios and an even larger part of their expected total return. In the previous chapters we have observed: II Equities generally provide long-term growth in real wealth. Their expected real, after-tax return is much greater than that of bonds or money market instruments. II Taxes are a major impediment to growing wealth. After-tax returns compound at a much slower rate. For example, over 25 years, 10 percent per year turns Si into $10.8, while 8 percent per year produces only $6.8. 11 Asset location strategies can reduce the impact of taxation. Matching the return characteristics of an investment to the tax characteristics of an estate planning or retirement entity can enhance after-tax returns and the transfer of wealth to heirs or charities. These factors support the view that minimizing the tax on equity returns should be an important consideration in investment strategies for taxable investors. Equities are interesting because, unlike bonds or bills, the investor can generally control when taxes are due. Appreciation is the main component of equity returns. Capital gains taxes on appreciation are due only when a stock is sold. Since the investor generally controls the decision to sell, investors can defer tax liabilities for many years. Tax deferral is powerful because it allows wealth to compound on a pretax basis. Tax deferral can be even more powerful when it can lead to tax avoidance. The step-up in basis eliminates capital gains tax liability on appreciated assets held by an individual who has died. The government waives capital gains taxes on appreciated assets given to charity. Many wealthy investors (1) will always have an allocation to equities and (2) will dispose of a significant portion of their wealth through death and/or charitable giving. Put these two factors together and you have a strong case for buy-and-hold equity strategies that allow market returns to compound with minimal capital gains taxes. There is an obvious tension between the desire to minimize taxes and the desire to enhance returns through active management. Active management implies turnover and the realization of taxable gains that could have been deferred through a buy-and-hold strategy. In this chapter we will analyze that tension and look at