The What (Asset Allocation) & Where (Asset Location) of Investing


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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

By Grant Wasylik,

Asset allocation is paramount.

Numerous studies confirm it. They show, time and again, that asset allocation accounts for 90%-plus of your investment returns.

As you probably know, asset allocation means implementing an investment strategy that seeks to balance risk vs. reward. You do this by adjusting the percentage of different asset categories in a portfolio according to your risk tolerance, goals and investment time horizon.

The classic “60/40 model” is a real-life example. “60/40” refers to 60% in equities and 40% in fixed income. This numeric breakdown has been a widely used catch-all for financial advisers and institutions.

More recently — and especially after the last financial crisis — a modernistic model has evolved …

“Alternatives” have joined stocks and bonds.

The new equivalent to 60/40 is something like 50/30/20 now. This 20% goes to alternatives (and takes 10% away each from stocks and bonds).

For the record, the top 40 institutions devote an average 17.6% to alternatives in their recommended asset allocation models. (To see where the BlackRocks, JPMorgans and Morgan Stanleys of the world allocate capital, click here.)

Typically, these three broad asset classes (equities, fixed income and alternatives) are stockpiled with these types of investments:

 Equity bucket: U.S. stocks, foreign stocks, large stocks, small stocks, etc.

 Fixed income bucket: U.S. bonds (Treasuries, municipal bonds, corporate bonds, etc.), foreign bonds (developed sovereign debt and corporate, and the same for emerging markets).

 Alternatives bucket: Commodities, hedge funds, private equity, Real Estate Investment Trusts, etc.

Most individual investors grasp this concept. And they’re able to manage it on their own. (Of course, the alternatives sleeve can be difficult to figure out.)

But many investors aren’t aware of the importance of asset location.

Asset location is placing or locating assets in the most tax-efficient account type. (Note: If you’re using a financial planner or investment adviser, they should be taking care of this for you.)

This often-overlooked strategy centers on tax minimization. With asset location, an investor can take advantage of the fact that different types of investments — and different types of accounts — receive different tax treatments.

So, if you take special care of asset placement between your taxable and retirement investment accounts, it can turn out to be financially rewarding.

Michael Kitces, a distinguished financial planner and educator I’ve seen speak at numerous investment conferences, provides a powerful example:

An investor has $500,000 in a taxable account and $500,000 in an IRA. The investor intends to implement a 50/50 asset allocation model ($500,000 in bonds and $500,000 in stocks).

Kitces simplifies things with the following assumptions:

 Bonds generate a long-term average return of 5% and are taxed at a 25% ordinary tax rate.

 Stocks generate a long-term average return 10% and are taxed at a 15% long-term capital gains tax rate.

 All investments are bought and held for 30 years.

Here is how each scenario unfolds:

Bonds held in taxable account and stocks in the IRA

Bonds grow at a 3.75% after-tax growth rate (5% gross returns less 25% taxation) … for a total future after-tax value of $500,000 x 1.0375^30 = $1,508,736.

Stocks grow at a gross return of 10% for 30 years … but are then fully taxable when withdrawn from the IRA (still assuming a 25% tax rate) … resulting in a final after-tax value of ($500,000 x 1.10^30) x (1-0.25) = $6,543,526.

Total after-tax wealth is $8,052,262.

Stocks held in taxable account and bonds in the IRA

Bonds grow at a 5% gross return … but then are fully taxable at the time of IRA withdrawal … for a future after-tax value of ($500,000 x 1.05^30) x (1-0.25) = $1,620,728.

Stocks grow at a gross return of 10% for 30 years … and the growth is then taxable at a 15% long-term capital gains tax rate … resulting in a gross value of ($500,000 x 1.10^30) = $8,724,701 … a tax liability of ($8.724,701 — $500,000) x (0.15) = $1,233,705 … and a final after-tax value of $8,724,701 — $1,233,705 = $7,490,996.

Total after-tax wealth is $9,111,724.

The end result is a difference of over $1 million!

This was accomplished by strategically shuffling investments between two accounts with different tax consequences.

You don’t need three decades to see an effect. Adapt a sound asset allocation, and start increasing your after-tax returns today.


Check out this roadmap for a general idea of where you’ll want to consider placing different security types:

Source: Forbes

When making your next investment purchase, don’t just think about what to buy (asset allocation) … also think about where to buy it (asset location).

And you’ll no doubt see that, just like when you’re buying and selling real estate, location can make a big difference in the long-term value of your investment.


Grant Wasylik


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