I’m a believer that the biggest factor contributing to the returns in your portfolio is asset allocation. The amount of your portfolio you choose to invest in stocks, bonds, real estate, or anything else will ultimately have the biggest effect on how your portfolio does over the long run.
In other words, the decision of whether to buy Lowe’s or Home Depot isn’t nearly as important than the decision to be in large cap stocks or international bonds.
If you’re being strategic about your saving, you’ll probably try to utilize tax advantaged accounts like IRAs, Roth IRAs, and 401(k)s as much as you can. If you’re using them (like most people), after a while your total portfolio will probably be spread across several different types of these accounts.
Today’s post covers asset location. Rather than replicate the exact same asset allocation in each of your individual accounts, placing your investments across them strategically can work to reduce your tax bill and enhance your after tax returns.
Since some asset classes are more likely to distribute taxable income & capital gains, parking them in the accounts you don’t pay tax on (like a Roth IRA), only seems logical. When done thoughtfully, asset location can as much as 0.25%-0.75% per year to your portfolio’s returns.
Read on to learn how it works.