What Is Asset Location? Can This Strategy Boost Your Returns?

Daniel Penzing
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What Is Asset Location?

Asset location is one of the most basic concepts in finance. Simply put, asset location is identifying where to invest your money to get the most return out of it. It’s a strategy applied by investors to get the most out of their assets, most commonly investments such as stocks, bonds and mutual funds, but it also applies to real estate, private equity, and fine art.

There are two aspects to asset location, strategic and tactical. The strategic aspect is involved in determining the asset mix that you want to achieve and involves more financial/emotional risks. The tactical aspect deals with deciding which investments to put where and the risk involved is more in the management and execution of the strategy.

Asset location can be used to minimize taxes by placing low tax assets in tax-deferred accounts and tax-free assets in tax-deferred accounts and then saving non-tax-deferred assets in a taxable account. It can also be used in investing to help a portfolio diversify and grow at the right rate for a person’s long term goals.

A Robo Advisor With a Solution

One emerging segment of the robo-advisor field is that of the solution-focused advisor. Advisors take a more holistic approach to investing and hiring, accepting that there can be no one-size-fits-all approach.

They employ strategies such as behavioral finance, paid subscriptions, segments based on life goals, and even allow investors to undergo a financial or coaching assessment. The purpose of this is to help align clients with the right strategy, regardless of their level of education or financial abilities.

Advisors such as Personal Capital, or Digit have risen above the robo-advisor ranks with these sorts of strategies. They offer comprehensive financial planning in exchange for a slightly higher fee than their non-solution-focused peers.

It is likely that the gap between robo-advisor services and financial advisors will continue to grow as robo-advisors continue to add more value and educate their clients. One of the great things about robo-advisors is that they are truly growing with their investors and advisors, not just into a new phase of their business cycle, but as new problems arise in society.

Should we subsidize the expansion of robo-advisors and other solution-focused advisors? Or should government look at less intrusive strategies for ensuring that the public receives the sort of financial advice they need?

Another Strategy: Tax-Loss Harvesting

As you can see, asset location strategy can create some nice tax advantages.

If you’re expecting a large capital gains distribution from a taxable mutual fund, selling shares of the fund to harvest a loss can save you on taxes.

You could lose out on some gains if you sell a fund with a good performance this year, but your overall tax bill will be lower this year.

Notice in the picture above that each trade is spread over multiple years rather than just one year. This helps you spread the tax out over time as well and avoid a large tax hit in one year.

This strategy will help you stay away from a high capital gains rate and way above the 15% long term capital gain rate in the early years of your retirement.

Conclusion

Asset Location is an important step that every investor must take before they start to invest. They need to know what they have in their investment portfolio.

Used frequently by investors, the strategy has recently become even more common with the rise of online brokerage accounts that allow investors to trade commission free.

Savvy investors are able to move investments to these brokerage accounts to lower their overall tax liability. But in order for investors to realize the potential of asset location, they need to thoroughly understand the technique.

The best way to get started with the strategy is to first pull together your entire investment portfolio. Include all of your accounts – 401(k)s, personal savings accounts, and brokerage accounts. Write down your current investment allocations in each fund. The easiest way to track your investments is to use free tool like Personal Capital Investing.

Next, you need to evaluate your asset location strategy. What do you have in your portfolio? Are you interested in lowering your tax bill? What are your current positions? Only then will you be able to completely assess your options.

A good asset location strategy can lead to higher after-tax returns from your investments and better known as a winning strategy for investors.