Asset Location vs Asset Allocation
Placing each asset in the account type where it is taxed least. How a portfolio is split across stocks, bonds, cash, and alternatives.
What is the difference between Asset Location and Asset Allocation?
Allocation = what you own. Location = which account you own it in. Nearly identical words, entirely different decisions.
| Asset Location | Asset Allocation | |
|---|---|---|
| In one line | Placing each asset in the account type where it is taxed least. | How a portfolio is split across stocks, bonds, cash, and alternatives. |
| Example | Holding a bond fund in an IRA and an index fund in a taxable account can add meaningful after-tax return. | A 60/40 portfolio is 60% equities, 40% fixed income. |
| Unit | Taxes & Account Types | Portfolio Management |
| Series 65 | Section 3: Client Strategies | Section 3: Client Strategies |
What is Asset Location?
Distinct from asset allocation. Tax-inefficient assets - bonds, REITs, high-turnover funds - belong in tax-deferred accounts; tax-efficient equity index funds and assets destined for heirs belong in taxable accounts to capture the step-up.
What is Asset Allocation?
The top-level decision about which asset classes to hold and in what proportion. Research consistently finds it explains the large majority of the variability in portfolio returns over time - far more than security selection.