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Asset Location

January 20, 2012

In past shows, we have often covered the topic of proper asset allocation when investing, but today’s podcast focuses on the importance of asset location.  This means focusing not only on diversification across asset classes in your portfolio, but also tax diversification within all account types.

Today’s show topic is a response to an email from a listener who was curious about our strategies for asset placement within all the different types of available investment accounts.  Below, our thoughts on asset location is broken down by account type:

  • Taxable accounts:  This includes any individual or joint brokerage accounts.  We typically like to hold investments with long term-growth potential, as well as those assets that have potential for loss harvesting.  The reason for this is that any income received in these accounts is taxable in that given year.  Holding riskier assets that may produce losses can help offset taxable income.  Investments that pay dividends can also work well in a taxable account because they offer a preferential tax rate.
  • Tax-deferred accounts:  This category is for your IRAs,  401ks, 403bs, Rollover accounts, etc.  In tax-deferred accounts, you don’t pay tax until you pull the money out in retirement.  Oftentimes with these accounts, you have to “love the one you’re with”, meaning you have to choose from the limited options that are offered to you within a plan.  It is important to choose the best options available to you within these accounts and then massage the rest of your portfolio to work together for the big picture.  We typically like to hold fixed income assets in tax-deferred accounts to put off paying tax on the income that is produced until retirement.
  • Roth accounts:  Roth accounts have the incredible advantage of being tax-free.  You essentially put money in now, let it grow, and never pay tax on it.  We obviously want to hold assets that have potential for significant growth in order to take advantage of that growth being tax free.  That being said, you only want to hold relatively safe, comfortable assets because losses are not allowed.  In Roth accounts, we commonly hold commodities, small and mid cap investments, and large cap growth investments.

We hope this gives you guys a good idea of what to consider when constructing your own portfolio.  You should also keep in mind that if you hold fixed income and equity investments in different accounts, performance for each account will not be the same.  You should always be looking at all of your accounts working together as a team, rather than each one separately.

Also in today’s show:  Brian gives his thoughts on the journey of a small business man and why he thinks entrepreneurship is harder than ever.

We would love to hear your feedback on today’s show as well as suggestions for future shows.  You can comment below or on our Facebook and YouTube pages.

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