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I came across the topic of “Asset Location vs. Asset Allocation” a few weeks ago when I was reading, and knowing how similar they sound, I thought they would make an excellent article to write. Asset Allocation and Asset Location are two completely different strategies but must be understood to build the most effective portfolio that aligns with your goals.

 

Let’s first dive into Asset Location.

 

Asset Location

Asset location is the process of placing your investment selections into specific accounts based on tax status. This is done with one goal in mind: appropriately managing and planning your tax liability during your investment cycle's growth and distribution phases.

 

There are many discussions around retirement savings and planning, but many don’t consider the tax liabilities that may occur during retirement. This is why an accountant and financial advisor are essential, valuable members of your investment team. Depending on your account type and investment type, your tax liabilities may be near or far-term. Consider:

 

Taxable accounts:

  • Index and other Passive accounts

  • Growth Funds with low turnover

  • Tax-managed funds

  • REITs

  • Municipal bonds

 

Tax-Deferred accounts:

  • Dividends

  • Most taxable bonds

  • Actively managed, high-turnover funds

  • Partnerships (MLPs)

 

Asset location essentially answers the ‘where’ question: “Where should I invest to align my goals with a tax-efficient plan?”

 

Asset Allocation

On the other hand, Asset allocation answers the ‘what’ question. “What should I invest my money in?” This is where you or your advisor helps select the funds and classes you invest in.

 

If you’re interested in learning more about asset classes, enjoy this quick read: Asset Classes: Understanding your investments (whitakerwealth.com).

 

Asset allocation is more than just selecting assets or asset classes or assigning a percentage to each. It is the output and culmination of the various inputs that the investor provides to their advisor.

 

This includes four key input components:

  • The time horizon of the investment(s) and investor

  • Strategic goals of the investor

  • Objectives of the portfolio

  • Investor risk tolerance

 

Each of the four items listed above has a qualitative and quantitative component. Recently, I’ve seen many complex methods that try to quantify and stratify an investor's risk tolerance. These are done through surveys, scenario builds/discussions, or, most commonly, interviews.

 

However the data is collected, the goal is to define and align all four key inputs to build a targeted asset allocation plan.

 

*An important aspect of asset allocation I purposely avoided was selecting funds with low correlations. I’ve discussed this in detail in this post if you’re interested in learning more about it: Correlation of Assets in Your Portfolio (whitakerwealth.com)

 

Does it even matter?

Well, simply put, yes, it does!

 

Knowing what to invest in and where to invest it will significantly influence your ability to meet your strategic goals in the future. Winning the lottery is not a good plan, but the team of Whitaker-Myers Wealth Manager Teachers(advisors) is ready to work with you to achieve your goals. Schedule some time with our team to explore this further and get on the right path.

 

Next week, we’ll take this topic one onion peel further, digging into strategic, tactical, and dynamic allocation portfolios. Stay tuned!

Asset Location vs Asset Allocation

June 17, 2024

Summit Puri

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