My question is by reducing the weightage of tax exempt accounts how can returns be increased??

Juan Pablo Alonso is now age 54 and anticipating retirement. Approximately 60% of his total
investments are currently held in a tax-exempt account and 40% in a taxable account.
Contributions into both accounts are made with after-tax income. In the tax-exempt account,
withdrawals are entirely tax-free and without penalty. In the taxable account, Alonso now incurs
a 20% tax on both income and realized capital gains. Realized losses can be used to offset
current or future income and capital gains.
Alonso experienced substantial losses in both of his investment accounts over the past year. He
estimates that he will need to postpone retirement and questions whether his investments were
structured optimally. Alonso meets with his advisor to discuss the effects of the tax regime on his
portfolios. The advisor suggests that over the last year, both Alonso’s after-tax return and
investment risk would have been higher if a larger proportion of assets had been held in the
taxable account.

A. Determine, based only on tax considerations, whether Alonso’s advisor is correct or
incorrect with respect to Alonso’s:
i. after-tax return.
ii. investment risk

Answer given :
Alonso’s after-tax return would have been greater than or
equal to his actual return, all else equal, if a greater proportion
of his investments had been in taxable accounts. This is
because he can use losses to offset other income or realized
gains.