The average mutual fund has lost about 2.5 percent a year to taxes on dividends and capital gains. Most funds are managed without regard to taxes, but taxes are something that can be controlled.

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You have some flexibility.

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Say we have to sell shares of Cisco to match its standing in a particular index. We sell the shares we have with the highest cost basis.

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This is a natural evolution of what we have long talked about at Vanguard -- that costs, broadly defined, are important in assessing funds' returns.

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Distributions are no reason to panic, ... What you're doing if you sell is realizing all of your gains. You're selling your fund and you're creating a taxable event.

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You've accelerated your liability.

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These costs do add up over time.

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You have to take each situation individually, ... Don't make a knee-jerk reaction.

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Taxes are the single largest cost for shareholders.

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