Quarterly Investment Foundations Third Quarter 2023

July 25, 2023


Anastasia K. Wiese

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Anastasia K. Wiese


Senior Financial Advisor


Mastering The Subject

Beyond Asset Allocation: Why Asset Location Matters

Your asset allocation – the way your invested money is distributed among various asset classes – plays a significant role in determining the levels of return and risk reflected in your portfolio. But beyond making decisions about your portfolio's asset allocation, you also need to think about asset location. Asset location involves selecting appropriate accounts to invest in with an eye toward keeping your assets and overall portfolio as tax-efficient as possible. This requires you to look at each type of asset you own and decide whether it should be held in a taxable, tax-deferred or tax-exempt account.

Typically, taxable accounts should be reserved only for the most tax-efficient assets – assets that tend to generate relatively low tax liabilities. Examples of tax-efficient assets include low-turnover stock index funds, international investments that generate foreign tax credits, and tax-free municipal bonds and funds. Generally, tax-inefficient assets, including real estate investment trusts (REITs), actively-managed, high-turnover stock funds and corporate bond funds, are best kept in tax-deferred or tax-exempt accounts. Tax-deferred accounts include 401(k) and 403(b) savings plan accounts and traditional IRAs, while Roth IRAs and Roth 401(k) plan accounts are tax-exempt under certain guidelines.

Creating and following an asset location strategy is particularly important for you if you pay a high marginal income tax rate, although you don't have to be in the highest tax bracket to benefit from such a strategy. Also, having an asset location strategy makes good sense if you expect to remain invested for the next 10 or more years, because the longer you keep your assets invested, the greater the potential benefits from tax deferral. In deciding how to invest, it is important to start by figuring out an appropriate asset allocation, based on your goals, return objectives and tolerance for risk. Then, work to render your asset allocation as tax-efficient as possible by focusing on asset location. At Grand Wealth Management, we place a high priority on providing each client with an active asset location strategy as part of offering tailored asset allocation services.

Market Check-In:

- Recessionary Signals: Leading economic indicators are showing faint signals of a recession ahead. In fact, Europe, after two consecutive quarters of shrinking gross domestic product of -0.1%, is officially in a recession. Globally, manufacturing has receded and, in the US, businesses are taking a more cautious approach to investment. After recent instability for some banks, lending is becoming tighter as well. However, consumer spending on services, most notably air travel in the US and Europe, may soften the landing.

- Long View for Bonds: Central banks around the world continue to battle inflation by increasing interest rates. While the US and Europe paused interest rate increases most recently, Canada and Australia continue to increase rates and the Federal Reserve indicated that they are not done increasing rates for this year. As inflation comes back down to the 2% target, central banks will eventually lower interest rates to stimulate economic growth again – this will benefit those who own intermediate-term (5-10 years) bonds today. However, for this past quarter, yields on short and intermediate-term bonds rose and prices fell.

- Stick to Fundamentals: When investing for the long-term, it is important to focus on expected returns rather than recent short-term results. The valuation of a category of stocks is one way to determine which stocks will have the highest expected returns going forward. Despite a recession in Europe and signs of weakening economic growth in the US, there are still good opportunities to invest in stocks. Stocks in Europe remain undervalued even after entering a new bull market after return of over 20% since October 2022. The valuations of US value, international developed, and emerging market stocks are below average. Investors who focus on owning a diversified portfolio of stocks that include these categories can expect higher returns in the future.

Avantis Monthly Field Guide 5/31/2023
Market Perspectives "Different Speeds" Charles Schwab 6/16/2023
"Guide to the Markets" JP Morgan 3/31/2023

The opinions expressed herein are those of Grand Wealth Management and are subject to change without notice. This material is not financial advice or an offer to sell any product. This does not constitute as investment, legal, or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. Projections and other forward-looking statements regarding future financial performance of markets are only predictions and actual events or results may differ materially. Grand Wealth Management is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Grand Wealth Management's investment advisory services can be found in its Form ADV Part 2.