How to Create a Portfolio Strategy [Video]

Hi and welcome back to the channel. I’m Steve and in today’s video I’m going to talk through the pieces of a portfolio strategy.

I’m going to explain and define two common terms that we hear a lot in relation to our accounts and our portfolios: asset allocation and asset location. There are two independent terms that have some key differences.

Asset Allocation

First is asset allocation. What comes to mind when I hear that term is the word “what.” What in relation to the types of investments I am going to hold. Am I going to hold stocks, bonds, cash, or some combination of all of those? 

You might have heard of something like the 60/40 portfolio, or maybe 70/30 or 80/20. Those are the percentages of the mix. Each portfolio will have some mix of stocks, bonds, cash, mutual funds, ETFs, etc. So it’s the allocation, the mix, of the underlying investments in your accounts. 

Asset Location 

Now let’s compare that to asset location. When I hear that term, I think of “where;” not what specific investments but what accounts. The question to ask yourself is, where are those investments now held? 

We have done a number of videos and articles on the three different types of accounts, but here is a quick summary. Taxable accounts are like your checking, savings, joint, individual, or maybe a trust account. Tax deferred accounts are your 401(k) or your IRA. The third account type is tax free. This would be the roth version of your 401(k) or IRA. This is where you put your investments. 

How Does This Create a Portfolio Strategy?

When we are thinning through this, and as our team builds a portfolio, we aren’t thinking of just allocation or just location. It’s not them against each other. It’s plus each other; you need the two of them combined. 

When we are thinking of the stocks you are going to own, and we think through how we expect them to perform. Are they something that will appreciate in value or hold steady? Are they paying dividends? Are they bonds that are paying interest? 

Then we are able to consider what account makes the most sense for you to hold those in. And not only are we thinking of a mix like 60/40 based on your time horizon. We are also considering that maybe the taxable account or tax deferred account isn’t a 60/40 mix but is 100% stocks.

Maybe that makes sense for your Roth account, because it’s tax free. We might want it to hold the highest appreciable assets or something that is paying out interest and dividend. If you are in a high tax bracket, maybe we want to protect those assets in that way. 

Next Steps for Building Your Portfolio Strategy 

All of that to say, the what and where are both vital pieces of your portfolio strategy. It’s not either or. The plans that work and are most efficient and where our clients are the most at ease is when we are considering both and doing both. 

So if you don’t have a plan or you don’t understand the difference between the what and the where. Please reach out. We have a number of different resources that can answer your questions. If you want to learn more about how we help clients have confidence in their investments, check out our investment management page.