Two Key Concepts for Wealth Management and Beyond (corrected March 2012)

Asset allocation is profoundly influenced by at least two underappreciated
concepts. First, tax-deferred accounts—for example,
401(k)s—are like partnerships in which the investor owns (1
– t_n) of the partnership principal and the government owns
the remainder, where t_n is the marginal tax rate when the funds are
withdrawn. Second, the government shares in both the return and the risk of
assets held in taxable accounts. The authors discuss these concepts’
implications for wealth management.