Diversification. It’s one of the few investing axioms that are drilled into investors’ heads from an early age. Thanks to modern portfolio theory, we know that a combination of assets – stocks, bonds, gold, etc. – allows investors to get better risk-adjusted returns and prevent major drawdowns. After all, gold zigs when stocks zag. The combination of “stuff” ultimately leads to better portfolio outcomes.
Asset diversification is as basic as it comes when we are talking about investing.
But most investors are clueless about where to stick all of these things. Asset location could be even more important than the combination of asset class, funds and stocks you own. And getting the location wrong could mean tens of thousands of dollars’ worth of lost returns.
The Basics
The old real estate slogan goes “location, location, location.” Investors may want to tap into their inner real estate developer when building out their portfolios. Where you put your stocks, bonds, and other assets – as in what kind of account they ideally belong in – has a huge bearing on just what kind of returns you’ll see from them.
The problem is taxes. While the hope from many investors is that President Trump will reform the tax code, the reality is, until it happens – and it’s a big if – we’re stuck with the code we currently have. And that code is a pretty complex animal. The asset class and how it distributes its gains, dividends or whatever can have a range of tax implications.
