Asset Allocation vs. Asset Location: Choosing Investments and Where to Hold Your Money

Asset Allocation vs. Asset Location: Choosing Investments and Where to Hold Your Money


So today we’re going to talk about asset allocation
and asset location, and how those two intertwine and can be used in conjunction with each other. So asset allocation is going to be the combination
of asset classes within your portfolio. So very high level, this is going to be how
much stocks you’re holding versus how much bonds you’re holding. So the more stocks you hold, the more growth-oriented
that portfolio is going to be. The more bonds you’ll hold, the more risk-averse
that portfolio is going to be. So what asset location is, is a tax minimization
strategy that intertwines with your actual asset allocation. So with asset location what you’re trying
to do is take certain pieces of your allocation and place them where they’re most tax-advantaged. So think about it like this: Your portfolio is comprised of 50 percent
stocks 50 percent bonds. We understand that stocks have a higher expected
rate of return than bonds. So knowing that in the relationship between
different pools of money – so there’s tax-free money, there’s taxable investments, and then
there’s tax-deferred investments, like 401(k)s and IRAs – and so where would you want to
hold the growth-oriented asset classes within your portfolio? We want to hold them in the Roth because you
never pay taxes again on any of the growth inside that portfolio. And then conversely, the safe assets, although
you still want to hold those within your overall asset allocation, you want to hold those likely
in the tax-deferred accounts because when you pull money out of those accounts you pay
ordinary income on any of the gains. So it’s just a tax minimization strategy that
allows you to hold different asset classes in different pools of money. The beauty of this is that you don’t take
on any additional risk when employing asset location because it’s still the same overall
mix, you’re just picking and choosing which asset classes to hold where. So, net after-tax, your returns tend to be
a little bit higher, and over time, if you’ve got a 10, 20, or 30-year time horizon, this
is more money in your pocket. So if you have any additional questions regarding
asset allocation or asset location, how that fits with your unique situation, visit our
website, PureFinancial.com, or come and check us out for a free assessment.

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