Asset location is one of the most important yet often overlooked aspects of investing. Simply put, asset location is where you invest your money. According to Anthony Pellegrino, while it may seem like a small detail, the location of your assets can have a big impact on your investment returns. Here’s a closer look at how asset location can help your investments flourish.
Anthony Pellegrino On How Asset Location Helps Your Investments Flourish
Asset location is an investment technique that can be used to maximize potential returns on investments, says Anthony Pellegrino. It involves positioning different types of assets in the most effective accounts so that they yield the highest possible return. Asset location strategies take into account not just the performance of the asset itself but also any tax implications associated with it and how certain accounts are treated for taxation.
An example of asset location would be placing stocks within a taxable brokerage account and bonds in a retirement account; this allows investors to benefit from stock market appreciation while deferring their tax payments due to their bond holdings being sheltered in a retirement account. This strategy ensures maximum growth potential without having to pay taxes until funds are withdrawn from the retirement account.
Another type of asset location strategy is placing non-tax-advantaged investments into a tax-deferred account. This can help to offset any capital gains taxes due on the investments since the government will not be able to collect those taxes until money has been withdrawn from the account. For example, if an investor owns a stock that has appreciated in value over time and they do not want to pay taxes when selling it at its current market price, they could put it into a tax-deferred account such as an IRA or 401k plan.
Asset location strategies can also involve using accounts with different levels of risk tolerance to achieve optimal gains. By placing more volatile assets like stocks within taxable brokerage accounts and less risky assets such as bonds or cash equivalents in tax-deferred accounts, investors can benefit from the upside of stock market appreciation while still being able to access their funds when needed.
In addition to providing tax advantages, asset location, as per Anthony Pellegrino, also helps investors capture more gains by positioning their assets in the right places. According to a 2018 Vanguard study, asset location strategies can add an average of 0.87% in returns annually over traditional portfolio approaches that do not use asset location tactics. Other research indicates that this figure could be even higher depending on the types of investments and accounts used for each asset class.
For instance, if an investor has a mix of taxable and tax-deferred accounts with investments such as stocks and bonds, they could potentially increase their annual returns by up to 1.5% if they use an asset location strategy to properly position those assets in the right type of accounts.
Anthony Pellegrino’s Concluding Thoughts
It is clear that asset location can be an effective tool for investors, says Anthony Pellegrino. By optimizing tax liability and making the most of expected returns, leveraging asset location can be a game changer to help your investments grow and flourish over time. In some cases, even allocating investments in different accounts between you and your spouse can result in considerable savings. However, there are also risks to consider before allocating assets to different accounts to ensure you’re making the right decisions for your finances and goals. Before changing any allocation, family members should check with financial advisors, CPAs, or other professionals who can provide up-to-date information about legal, accounting, or tax regulations that may apply. With the proper guidance from qualified professionals and real consideration of how taxation works when it comes to investing, asset location can offer significant opportunities to grow a portfolio’s value over time.