Kyle Stacey is a CERTIFIED FINANCIAL PLANNER™ professional with Pure Financial Advisors. Kyle graduated from San Diego State University, earning his BA in Financial Services and received the SDSU Personal Financial Planning Certificate. Kyle works directly with clients to help them accomplish their financial goals specifically pertaining to the areas of retirement planning, tax planning, [...]

Kyle Stacey, CFP® explains the difference between asset allocation and asset location, and how they work together in your investment portfolio.

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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’ll 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 imploring 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 in and check us out for a free assessment.

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