But here's another chestnut that often gets left out: It's not what you make, it's what you keep. Taxes matter -- a lot -- and folks who plan their portfolios without adjusting for them will end up with less cash than they think.

That's the conclusion of a study published in a recent issue of the Financial Analysts Journal by William Reichenstein, a financial analyst and investment management professor at Baylor University in Waco, Texas.

"Financial managers who use the traditional approach to calculate individuals' asset allocations are miscalculating their true allocations," he writes. "The ... errors can be substantial."

Reichenstein argues for calculating investments on an after-tax basis when weighing how much of a portfolio they take up. And tax treatments of investments should be considered when divvying up those assets into taxable, tax-deferred, and tax-free portfolios.

To make sure that you're keeping more of what you're making, first understand that different investments have different tax treatments.

Profits on stocks held for less than a year are considered regular income, as are money market interest, real estate gains and bond dividends. Their tax rates can top 30 percent.

But for stocks held longer than a year, the rate goes down to 15 percent or less. Dividends on shares held at least 60 days around the time of the payout are also taxed at a 15 percent top rate.

Got all that? Good. Now learn the tax treatment of different accounts.

Money made on investments held in individual retirement accounts, 401(k)s and the like is tax-deferred. That means you won't have to pay taxes on capital gains from your IRA now, but years later, when you start cashing it out, you'll pay income taxes on your withdrawal. Earnings on investments held in a health care savings account or Roth IRA may never be taxed at all.

Now put it together by putting the right assets in the right accounts.

Those investments that potentially carry the highest taxes -- bonds, bank CDs and real estate mutual funds -- should go into tax-free accounts first. Put low-tax investments, such as growth stocks held directly, or stock exchange traded funds or stock index mutual funds, into regular taxable accounts.

Here are two other steps you can take:

-- Guesstimate future taxes. Maybe you live in a high-tax state or make so much money that you're in a top tax bracket, but you expect to retire on less income in a low-tax state.

It's hard to come up with a future tax figure if you're still many years away from retirement, but worth considering anyway, even if only for a rough estimate.

-- Calculate your own optimum asset allocation based on how much the investments are worth after their taxes are applied.

For example, let's say you are aiming for a portfolio that's 70 percent stocks, 20 percent bonds and 10 percent cash. A taxable portfolio of $7,000 in stocks, $2,000 in bonds and $1,000 in a money market fund wouldn't really accomplish that after taxes.

The $7,000 stock portfolio, which includes $2,000 in unrealized gains, is potentially worth $6,700 after 15 percent capital gains taxes.

The bond portfolio of $2,000 includes $560 in earned income, so it is worth $1,804 after you pay the 35 percent combined federal/state income tax.

The money market fund holdings of $1,000, of which $50 is earned dividends, would be worth $982 after income taxes.

The portfolio's actual ratio? Stocks, 70.6 percent, bonds 19 percent, cash, 10.3 percent. If the bonds and cash were held in tax-free accounts instead, the ratio would look like this: stocks: 69 percent; bonds, 21 percent; cash, 10 percent.

That may not seem like much of a difference, but it's based on small amounts and only a year or two of earnings. If you rebalanced your portfolio for 25 years based on pretax holdings, your collection of assets could be seriously askew when it comes time to cash them in and pay Uncle Sam.

That doesn't mean you must -- or even should -- redo your portfolio every year based on what you guess taxes will be in 2025. But putting the right asset in the right account and being mindful of future taxes when deciding how much of an asset to buy will help you in the long run.

(Linda Stern is a freelance writer. Any opinions in the column

are solely those of Ms. Stern. You can e-mail her at

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http://news.yahoo.com/s/nm/20061210/bs_nm/column_investing_dc&printer=1

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