Asset Allocation and Asset Location Decisions Revisited
By WILLIAM REICHENSTEIN
In this article, we go back to basics, but do so in the presence of taxes. There are but two assets: a stock fund and a bond fund. Each asset can be held in taxable accounts, deductible pension accounts, or both (deductible pension accounts include, e.g, 401(k), 403(b), Keogh, and SEP-IRA). An individual investor has some assets in taxable accounts and others in deductible pension accounts. He asks his financial professional to do three things. First, calculate the portfolio’s current asset allocation. Second, recommend an optimal asset allocation. Third, recommend an optimal asset location. More specifically, he asks whether he should, to the degree possible, locate stocks or bonds in tax-sheltered pension accounts.