How can using different types of accounts affect performance?
Like most investors, you’ve probably heard of asset allocation (creating a mix of different types of assets, such as stocks, bonds, and cash alternatives in a portfolio), even if you’re not using it. On the other hand, you may not be familiar with asset location, which aims to enhance returns by distributing various investments into their most tax-efficient type of account.
While the strategies may sound similar, they’re actually quite different, and the strategists at Wells Fargo Investment Institute believe using the two together may enhance your investment performance.
To integrate asset location with asset allocation, it’s important to understand that:
- Asset allocation is a portfolio’s blueprint, tailored to help deliver an optimal risk-adjusted return.
- Asset location seeks to enhance a portfolio’s after-tax returns by placing assets in tax-efficient vehicles.
- To choose the most tax-efficient vehicle for an asset, you need to understand the portfolio’s objective, the types of assets in the portfolio, and your short-term liquidity needs.
- A common view is to hold tax-inefficient assets in tax-advantaged accounts and hold tax-advantaged assets in taxable accounts.
To learn more, download your free guide on understanding asset location.