for individual or family investors. Tax considerations, spending requirements, and estate planning issues greatly complicate the development and implementation of investment strategies. Our goals will be (1) to show that the principles developed in the preceding chapters are relevant to individual investors and (2) to demonstrate ways to accommodate these complicating factors in our formulation of investment analysis. Individual investors generally seek to preserve and grow the real, after-tax value of their estates. We will focus on investment strategies for wealthy individuals. Such individuals will generally not consume all of their wealth and thus will leave an estate. Integrating estate-planning issues with investment strategies will be a recurring theme in our discussion. Tax rates are always changing and vary from one state to the next. For simplicity, we will assume marginal tax rates of 40 percent on ordinary income and short-term gains and 20 percent on long-term capital gains.1 We will use these rates in all examples in the following chapters, unless otherwise noted. We will assume a 50 percent estate tax rate. The efficient frontier is a good visual aid for understanding portfolio management issues. The activities of investment managers and financial advisors generally fall into one of two categories: (1) develop more efficient portfolios by improving the expected return per unit of risk (i.e., shift the efficient frontier upward) or (2) help investors identify and reach the point on the efficient frontier that is appropriate to their circumstances. Many investors and their advisors find it difficult to integrate taxation, estate planning, spending, and inflation issues into their investment analysis. Consequently, they follow a strategy of first seeking to maximize risk-adjusted nominal pretax returns and then dealing with tax, estate, and spending issues. Given the enormous impact of income and estate taxes, this approach is almost certain to lead to inefficient asset allocation and portfolio strategies. Bob Litterman made the following points concerning risk in Chapter 2: ]At the time we wrote this, President Bush has just announced a proposal to eliminate tax on dividends. The calculations made throughout this book assume that dividends are taxable.