Asset Location | Summary and Q&A

35.3K views
August 17, 2018
by
Ben Felix
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Asset Location

TL;DR

Asset location optimization, the practice of holding certain asset classes in certain account types to minimize tax drag on returns, may not be worth the effort as it relies on predicting future returns and comes with regulatory risk and added complexity.

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Key Insights

  • 🚕 Asset location optimization is a tax planning strategy aimed at minimizing tax drag on investment returns.
  • ↩️ The strategy assumes accurate predictions of future returns, which may be challenging or impossible.
  • ↩️ Studies have shown that asset location optimization may add value to after-tax returns, but the value diminishes significantly when using actual returns instead of expected returns.
  • 🧑‍🏭 Regulatory risk and added complexity are additional factors to consider when deciding whether to pursue asset location optimization.
  • 📼 Some experts question the value of asset location optimization, suggesting that it may not be worth the effort.

Transcript

I think that most of the people watching  my videos would agree that it is next to   impossible to beat the market consistently through  stock picking or market timing. Knowing that,   it is sensible for investors to look for other  ways to get more out of their investments. Tax planning is one way that investors  can keep more of their returns. As... Read More

Questions & Answers

Q: What is asset location optimization?

Asset location optimization is a tax planning strategy that involves holding certain asset classes in specific account types to minimize the tax impact on investment returns.

Q: Why is predicting future returns important for asset location optimization?

Asset location optimization relies on accurate predictions of future returns to determine the optimal location for each asset class. Without accurate predictions, the strategy may not offer significant benefits.

Q: What are the potential risks of asset location optimization?

There is regulatory risk associated with asset location optimization, as changes in tax rules can render a previously optimal location suboptimal. Additionally, the added complexity of managing different accounts can make tasks like rebalancing and investing new money challenging.

Q: What do experts say about asset location optimization?

Some experts cast doubt on the value of asset location optimization. They argue that if even experts cannot agree on an optimal strategy and the complexity outweighs potential savings, it is best to replicate the same allocation in all accounts.

Summary & Key Takeaways

  • Asset location is a form of tax planning that involves holding specific asset classes in certain account types to minimize tax drag on returns.

  • Studies have shown that optimal asset location may add value to after-tax returns, but only if future returns can be accurately predicted.

  • However, when actual returns are used instead of expected returns, the average value added drops significantly, and the optimal asset location strategy only outperforms a same-portfolio approach 58% of the time.

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