Asset Allocation vs. Asset Location

November 18, 2014 // Bucket Strategy Investing

Most advice on saving for retirement that’s put out by bloggers, columnists, and journalists centers around the concept of asset allocation (that is to say, dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash). They all tell you that you can best reach your retirement goals by placing your funds into different categories, dividing them up based upon age, risk tolerance, or projected retirement date (or some combination of each).

That’s great advice, but it’s only one part of the structure of your retirement plan. While asset allocation is important, perhaps equally important is asset location. In other words, where is the best place to hold those allocated assets? Which ones belong in your IRA or another tax-deferred vehicle, and which ones belong in your personal accounts?

It’s not that the topic of asset location is ignored by the media—it’s that the media tends to address the topic incompletely. Most financial bloggers, columnists, and journalists tell people that tax deferral is always best. They tell people that they should always spend the money in their personal accounts first, allowing their tax-deferred accounts to grow as long as possible, and they preach that it’s never a good thing to pay taxes sooner than you must. But the reasons for offering this advice are normally vague and misleading. What they’re really doing is offering a short-term “solution” to a long-term problem. Indeed, they’re not just pushing the tax problem down the road—they’re also potentially creating an even bigger tax issue when a retiree turns 70 ½.

The bottom line is that your advisor should be creating a strategy that emphasizes the location of your assets as much as their allocation. The two processes are inextricably linked, and you may not notice the consequences of a wrong decision until it’s too late to set things right.

To see if your asset location is working in lockstep with your asset allocation, call us at 800-644-1150 or email us. We’ll review your individual situation and construct a retirement plan that’s custom tailored to your individual retirement goals.

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal.

Investment advisor representatives of Lucia Wealth Services, a registered investment advisor, are also registered representatives of, and offer securities through, Lucia Securities, LLC, a registered broker/dealer, member FINRA/SIPC. Lucia Wealth Services and Lucia Securities, LLC are wholly owned subsidiaries of Lucia Capital Group.

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