Tax efficiency is a fine thing, but not if the price is lower returns. Profit is a dollar you can spend—unlike tax-efficiency, which you can't. That's why I've said for years it isn't tax efficiency that investors should strive for, it's after-tax returns.

And Vanguard has finally gotten the after-tax religion. In fact, Vanguard wrote that focusing on a low turnover rate as the key to fending off distributions was a "flawed" approach. So what should you focus on? Simple: how much you keep after you pay Uncle Sam.

Every year in The Independent Adviser for Vanguard Investors, I take a look at the tax-efficiency and after-tax returns of all Vanguard funds for three-year and five-year periods. Instead of showing you what's popular with the press, like low turnover ratios and low capital gains distributions, I show you what funds have given the most bang for your buck over the long term when all is said and done, including your taxes.

As you can see from just the top 5 funds over in the three-year table, the most tax-efficient funds and the best performers are completely different.

For the five-year period, while several of the same funds show up, the story hasn't changed: The most tax-efficient funds don't necessarily leave the most profits in your pocket after you've paid your dues.

You need look no further than a fund like Vanguard Growth Equity , with its 99.9% three-year tax efficiency and 99.4% five-year tax efficiency, to get the point. While the fund's share­holders weren't paying much in the way of taxes over the past five years, they also weren't earning much in the way of returns. Over five years, Growth Equity's after-tax return was second-worst only to Vanguard U.S. Growth , which both lost money and paid out a tiny bit of income. U.S. Growth ended up with negative tax efficiency.

Analysis that shows where to find strong after-tax returns is also one reason why I've told my subscribers for years now that investing in index funds is not the path to guaranteed outperformance. Just because many index funds are "tax efficient" and have low turnover doesn't mean they'll make you richer, faster, as Vanguard Extended-Market Index and Vanguard SmallCap Growth Index demonstrate.

So this distribution season, as you make decisions about how to reallocate your portfolio and what funds to buy or sell, don't let the tax tail wag the profit dog. Instead, be a tax-smart investor, and consider what you keep after you pay the tax man.

Stumped for holiday gift ideas? Even in this high-tech media age, I say there's nothing more satisfying than a good read. While I continue to enjoy the classics (I re-read Homer's Odyssey in a new translation recently, and it was fabulous) as well as good novels, every once in a while a few books with a Wall Street twist come along that make their way onto my night table. Allow me to share a few of my favorites.

	Wall Street Noir Peter Spiegelman, Editor To diversify your reading, mix the Pavlo non-fiction with this compendium of smart, dark short stories written by some of the crime genre's leading lights. In addition, there's even a story by the discredited former Merrill Lynch technology analyst Henry Blodget. Short stories make great bedtime reading.
	King Of The Club Charles Gasparino Charlie Gasparino is a dogged reporter who got deep inside the New York Stock Exchange and the controversy over Dick Grasso's multi-million dollar retirement package, and he tells a fast-moving tale about greed, strong personalities and the politics of power in this new book. I'm a friend and fan of Charlie's, so take my comments with a grain of salt. That being said, you'll find this tale fascinating.
	Stolen Without A Gun Walter Pavlo and Neil Weinberg Who knew that selling, re-selling and cheating in the long-distance telecom business could be so simple, and so lucrative? To get a unique insight into how MCI blew up and eventually led to WorldCom's demise, check out this tell-azll by Walter Pavlo, the jailbird who stole $6 million from MCI before he was finally disconnected. Fast-paced writing by Forbes editor Neil Weinberg keeps the story on the fast track--like a train heading into a concrete wall. Happy holidays!

MutualFundWire asked me for my latest take on Vanguard's three new ETFs. You can access the complete release here.