For those investors in the highest possible marginal tax brackets, this benefit could potentially be far larger than all the other possible benefits. Tax minimization tends to be more rule-based and therefore more predictable and consistent than other approaches.  We know the tax code with certainty, therefore we can establish a portfolio management approach designed to minimize the impact of that tax code.

On the other hand, successful active tax management has a higher price and meaningfully interferes with (or flat out prevents you) from emphasizing the other four factors.

3. Attempting to achieve outperformance through active management.

Individual markets occasionally offer tremendous opportunities for investors to win sizable outperformance, and harvest gains from the large number of market mispricings (dislocations) while very few rivals are doing the same. Think of a lake populated with many large fish and no fisherman around other than you.

Unfortunately, often the opportunity for successful active management is poor at best.  Frequently, markets become quite efficient, eliminating virtually all significant opportunities to find mispricings. Think of a lake with very few small fish and numerous other fishermen besides you seeking to hook them.

4. Attempting to reduce your exposure to the most severe stock market collapses.

If this strategy is successful, the investor benefits by being less exposed to the most extreme stock market declines.

But in a world defined by modern portfolio theory, nothing is free. Over the long run, lower risk portfolios will also garner lower returns. The only way to maintain one’s expected return level, while at the same time reducing the chance he’ll suffer egregious losses, is to increase the frequency with which he expects to realize small losses.  In other words, it is impossible for so-called downside protection schemes to reduce your total risk while still maintaining your expected return.

5. Similarity to peers. (In other words, a portfolio that looks like other people’s.)

One finds comfort in the crowd. Many feel safer by minimizing their own differences from their peers.