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.
Happy New Year from the Money-Guy team! It is great to be back after our holiday break, and we are very excited to share our thoughts on the economic outlook for 2012 in today’s show.
Before we jump into 2012, we’d like to take a look back at The Wall Street Journal’s Top 5 Economic Charts of 2011:
1. Jobs – This chart shows the history of job creation after past recessions, breaking it down by industry. Highlight: 6.6 million jobs currently need to be added to the economy to regain the pre-2008 downturn level.
2. Comparing Recoveries – This chart compares the current economic recovery to past expansions based on GDP, jobs, home prices, incomes, and corporate profits. Highlight: The current recovery is the slowest in terms of disposable personal income and bank lending, but above average for exporting goods and services and corporate profits.
3. Consumer Spending – This chart illustrates consumer spending patterns since the recovery began. Highlight: Spending on discretionary services has continued to decrease.
4. Debt – This chart shows debt patterns of households, businesses, and the federal government since 1970. Highlight: While households are reducing their debt burden, the government’s load is growing heavier.
5. Trade - This chart follows U.S. trade with other countries since 1990. Highlight: China replaced Japan in the top 3 destinations for U.S. exports and imports, along with Canada and Mexico.
Now that we have taken a look back, let’s focus on the future. Kiplinger’s Personal Finance magazine recently released Our Investing Outlook for 2012 and opened with Benjamin Graham’s theory: “In the short run, the stock market is a voting machine, considered by many the ultimate investing sage. But in the long run, it’s a weighing machine, meaning that over time a company’s shares will command the price its business prospects deserve, measured by such basic yardsticks as profit growth, balance-sheet strength and management vision.
Kiplinger’s outlook:
They predict continued volatility with both breakout rallies and occasional downward spikes for 2012. They also predict that profits for companies in the S&P will improve by 6% to 7% in the coming year. The housing market will be boosted by the government’s latest loan-modification efforts. Politics will weigh on markets. Successful investors will be those who take advantage of the ups and downs by dollar-cost-averaging. They also think the best opportunities lie in stocks as opposed to bonds, and in U.S. stocks rather than foreign companies.
Here are some of our tips for improving your financial well-being this year:
- Set up adequate cash reserves (3-6 months of expenses, depending on your situation)
- Save 15-20% of your gross wages
- Design a net worth statement to assess your current financial situation
- Take advantage of any employer matches in company sponsored retirement plans
Here at the Money-Guy Show, we are optimistic about things in the coming year. While market volatility may persist, it is encouraging to see balance sheets on the consumer and business side improving. There are a lot of positive things happening and we are excited to see where 2012 takes us. We would love to hear your questions and comments below or on our Facebook page. Also, don’t forget to check us out on YouTube.
