Get Your Asset LO-cation Right to Boost Your Wealth

Most investors have heard of asset allocation, which is the proportion by which your investment portfolio is divided between different asset classes such as stocks, bonds, real estate and cash.

Fewer investors have heard of, or pay attention to, asset LO-cation.  But they should, for two reasons.  First, using smart strategies for asset location will build your wealth faster by reducing your tax bill.  Second, shrewd asset location will allow you to better control the timing and magnitude of taxable events.

Asset location refers to an investor’s strategy of holding certain types of assets in taxable accounts and certain types of assets in tax-sheltered accounts.  If an investor has virtually all of his or her portfolio in an IRA (or in a taxable account), then asset location will of course not come into play.

Investors with both taxable and tax-sheltered accounts will want to hold specific investments in the account type that will give them the biggest tax benefit over time.  Thus, in general, investments with high tax costs, such as high-yield bonds, emerging market bonds, corporate bonds, real estate investment trusts (REITs) and preferred stocks are usually best held in tax-sheltered accounts such as IRAs and 401(k)s.  Individual stocks (that pay low or no dividends), tax-friendly mutual funds and municipal bonds (which are exempt from federal tax and often state tax as well) are best held in taxable accounts.

However, asset location, like asset allocation, should not be a “set-it-and-forget-it” strategy for two reasons.  First, the tax treatment of investments can change over time, so your asset location strategy should evolve to take advantage of these occasional changes.  For example, dividends from stocks used to be taxed at the ordinary income rate.  Now most of these dividends are taxed at lower capital gains tax rates.  This change has made it more palatable to keep dividend-paying stocks in taxable accounts.

Second, the payout levels for different asset classes are always in a state of flux, so your asset location strategy should take these changing payouts into consideration as well.  In times of very high interest rates (e.g. the 1980s) it made sense to hold cash in your retirement account, where the high interest paid on that cash was sheltered from being taxed at the ordinary income tax rate.  Today, however, cash yields virtually nothing, so it is fine to keep it in your taxable account to free up space in your tax-deferred accounts for higher-yielding and more long-term oriented assets.

Investors need to get the big picture right first . . . and this means determining the proper asset allocation that balances the pursuit of long-term investment goals with tolerance for portfolio volatility.  We use an online risk measurement tool to help investors to nail down their specific risk tolerance.  It takes three minutes to do and can be found here.  Once you know your Risk Number from the questionnaire, we can help you to quickly determine if your current portfolio is too risky or too conservative based on your goals and time horizon.

Once your proper asset allocation is established, then it’s time to address asset location.

To see how we might recommend changes to your portfolio to take advantage of optimal asset location, please call us at 619-435-1701 or email me directly at

To learn more about our portfolios, please visit us our Portfolios page.

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