Asset Location, Location, Location…

There’s an old joke –

Q. Why is kissing a lot like real estate?

A. Because what matters most is location, location, location.

The same could be said for investing.  Where you plant that investment matters.

Let’s assume that you read my last blog regarding asset allocation and you did some homework on what is the ideal asset allocation for you. How do you proceed from there?

The Bucket List

I view there are essentially 3 kind of buckets for you to invest your money in from a tax perspective, Taxable, Tax Deferred, and Tax Free.

Taxable Buckets – Think your Brokerage Account
Taxable buckets –There are two tax rates one faces in taxable investment account, the higher ordinary income and short-term capital gains tax rates; and the bit lower long-term capital gains and qualified dividend tax rates.  An investor who is taxed at the 35% Federal tax rate for ordinary income and short-term capital gains will be taxed at the 15% Federal tax rate for long-term capital gains and qualified dividends.

What To Emphasize in The Taxable Bucket: Tax Free Municipal Bonds, Domestic Stocks and International stocks.

Tricks: Focus on buy and hold.  Sell investments which have unrealized losses since you will be able to use those losses to lower taxes by lowering your  taxable ordinary income and realized taxable capital gains.  If you must sell, try to wait until you have held the investment for over a year so that you pay the lower long-term capital gains tax rate.

Tax Deferred Buckets – Think your IRA, 403B, and 401K
Tax Deferred Buckets – The good news is you usually get a tax deduction when putting money into the tax deferred bucket.  This way you pay less in taxes and have more money to put in to begin with. Also, no taxes are paid on any interest, dividends, and realized capital gains earned prior to withdrawing funds. The bad news is you pay the higher ordinary income tax rate when you eventually do pull out the money.  You have deferred that tax at least.

What to Emphasize in the Tax Deferred Bucket:  Taxable Bonds, Real Estate Investment Trusts (REITs).  Mutual funds which are tax inefficient by their nature.  Focus on investments which pay a lot of taxable interest, ordinary income and/ore which generate a lot of short-term capital gains.

Tricks:  Unlike common stock dividends REIT dividends are taxed at the higher ordinary income rate so tax deferred accounts are a good parking spot.  When you need to rebalance your overall portfolio, rebalancing in your IRA/403B/401K will allow to rebalance without creating any capital gains taxes.  Consider weighting assets with lots of long-term appreciation potential in your taxable bucket, or better yet, your tax free bucket where you can pay the lower capital gains tax rate or no taxes at all in the case of the tax free bucket.

Tax Free Buckets – Think your Roth IRA, Roth 401K
Tax Free Buckets – After-tax money usually goes into tax-free buckets.  While you have paid taxes on the earnings which funded the tax free bucket, all income and appreciation thereafter are tax free.

What to Emphasize in your Tax Free Bucket:  I call this my shoot for the moon bucket.  I recommend a well-diversified mix of one’s riskiest highest expected return assets.  Shoot for the moon but keep in mind it took a lot of technology, math, and research to get man on the moon, so be aggressive but be diversified and well thought out following the best academic research.

Tricks:  I pretty much just put equities in Roth IRA accounts.  I focus on a well diversified broad market allocation, but then skew the portfolio from there to include small agressive stocks and emerging markets.  I shy away from individual holdings particularly in the Roth since tax losses cannot not be taken in a tax free account.  Finally there is a strategy when one is retired to convert Roth IRA assets to regular IRA assets between retirement and receiving Social Security.  When you get there, talk to me about it and I will walk you through the issue.

Please note I used the word “emphasize” several times above regarding what to include in each bucket type.  You still want each of your buckets to be well diversified and include several asset classes if possible.

Hoping not to get too lost in the details, here’s a really simple way of looking at it:

Figure out your target allocation then break it out as such –

Taxable Accounts
More Stocks (Domestic and International)
Less Bonds – Consider Municipal Bonds when you do
Generally no REITs

Tax Deferred Accounts
More Bonds – Corporate and US Government Bonds
Less Stocks (Domestic and International)

Tax Free
Little to No Bonds
Lots of Diversified Equity (Domestic and International) – especially riskier and/or high dividend equity investments
Some REITS perhaps

That’s it for now.


Asset Allocation: A Beginner’s Guide

There are principles in Finance that are rigorously studied at the highest levels of Academia , which often come across as abstract, obtuse, and barely understandable.  Frequently these principles boil down to some basic common sense such as:

  1. You should only take risk you have a reasonable chance of being compensated to take. Higher risk assets should offer higher expected returns.
  2. Take only as much rick as you can afford to take. Don’t bet the farm unless can afford to lose the farm.
  3. Don’t put all your eggs in one basket. Mitigate risk. Diversify. Diversify. Diversify.

All three of the above have one key word in common, ‘Risk.’  Anything you can do to mitigate risk while keeping the opportunity for the same return, or even higher return, you should absolutely jump on.  Let’s dig into each one a bit further…

No. 1 Risk & Return 

While hard for some people to grasp, holding concentrated equity holdings in just a few companies often backfires.  You are just not compensated for the amount of risk each company faces individually since it is so easy to hold a broadly diversified basket of stocks.  The simplest way to avoid getting one bum egg is to buy a couple dozen of them.  Start with buying the Vanguard Total Stock Market ETF (Ticker VTI) and be done with it.

No. 2 How Much Risk Can You Handle?

Nearly all of us likely need to save more. The best strategy is to start as early as possible so that you have the most time to invest and handle any bumps in the road, which will always occur.  The tough-love truth of it all is that as you get older and closer to retirement, time is running out and you need to start investing in more stable, lower return, investments.

In a very simple example, take the above fairly volatile higher expected return  Vanguard Total Stock Market ETF (VTI), and pair it with the more stable, lower expected return iShares Core U.S Aggregate Bond ETF (AGG), increasing how much you invest in the more stable U.S. Aggregate Bond investment over time.  Fine tune the mix to best fit you.  Here’s a pretty generic example to give you the gist of it all-

Age Chart

Risk is a very personal thing.  Here’s a link for a risk profile questionnaire from Vanguard that can help get you going:

No. 3 The Risk Mitigating Mosaic – More. More. More. Plus…

Diversify. Diversify. Diversify.  In the above example, I took two assets classes, U.S. Stocks and U.S. Bonds, and with your judicious pairing of just those two asset classes you have taken a big amount of risk out of your portfolio and you have fine-tuned your investments to fit your specific needs.

However, why stop there?  Dig into it deeper and go from there.  A good primer for those willing to dive in beyond the baby pool (probably a good idea) is William Bernstein’s The Intelligent Asset Allocator ( After reading that you may start seeing the artistry in such mosaics as this one –


Perhaps we can dive into deeper detail in future posts on the broad range of asset classes and how more value can be added by more diversification.

What’s in My Wallet?

I thought a way for you to get to know me and a way for me possibly share some high-level personal finance ideas would be for me to crack open my wallet and share what is inside.

First of all I have my driver’s license, proof of both medical and auto insurance, a few of my business cards and those of others and some coupons for a car wash place I need to use up.

More in the financial nuts & bolts of it all, I probably have too many credit cards. However, my credit score is over 800 and there is a method to my madness. The cards on the left side of my wallet are all for my personal use and are set up to be downloaded to my personal Quicken account, which I do daily.  The cards on the right side of my wallet are all for my business’s use and are setup to download into my QuickBooks business accounting program.

Being a business owner it is important to keep my personal and business spending quite delineated.  Having cards specifically dedicated to each use helps.  Having them all setup to download into my respective personal spending and business software saves me a lot of data input time.


A few big picture thoughts

  1. NEVER run a balance on your cards EVER.  Pay off your credit card IN FULL every month.  If you do have a credit card balance, it’s time to eat peanut butter sandwiches, wear what you’ve got, and stay away from the vacay.  In this instance  “Just do it” means “No New Nikes.”  Even the best credit card rates are usurious in nearly all circumstance.  Keep in mind advertised low rates are often teaser rates to suck you in and get you to run up a balance for higher rates down the road.
  1.  ALWAYS get something out of the card. I get United Frequent Flyer miles and great foreign exchange rates out of two cards. Five percent cash back from Target from one card and 5% cash back from Amazon on another. Four percent cash back on gas from my Costco Chase card.  Dig around find which Air Miles programs work best for you.  This guy is good:
  1. Put it ALL on the card. What?  First of all, you have no credit card balances since you ate peanut butter sandwiches all last year. Believe me I know.  I’ve done it.  Putting more on the credit card gets you more cash back or other benefits.  Tie your cards to your spending tracking software and you will have a better sense of how much you spend.  In addition, you will have various forms of purchase protection.  Last year I took four people to Hawaii using miles I had got on my credit card and the rental car that got a bit banged up when we went beyond the paved road was all covered by my Visa’s extended rental car insurance coverage.
  1. Put automatic payments on your credit card and NOT your bank account. I like to control my checking account balance.  Having automatic payments take money out when they want bugs me.  I’d rather have those payments hit the credit card where I can review them when I want, and better yet, pay them when I want as long as it is before the credit card’s due date.  This can push out when you have make the payment sometimes beyond a month.  Plus you get cash back, miles, or whatever benefit you have researched works best for you.

That’s it.  Out of habit, I pay off my credit card balance in full right when I get the statement.   That seems to improve your credit score for some reason.  Cash?  I usually keep the cash in my wallet pretty tight.  Although I always have cash on hand.  Don’t me a lame cashless cheapskate when out with friends.

One final thought is once you get the cards that work for you, be selective about canceling cards and switching to new ones.  I am not saying don’t ever do it.  I am saying be selective and intermittent.  This is especially true when looking to borrow money for a car or home. Having a few credit cards with a long credit history boosts the score.  Recently opened cards can push it down. Just be judicious and timely.

Some more personal financial thoughts down the road.

Luck is the Residue of Design

There seems to be the American Dream of striking it rich.  While some folks are born rich and other really luck out, most financially stable folks did it over a long time. Also just because you become rich is no guarantee  that you will stay rich.  There is a bit of a crisis among retired NFL players running out of money shortly after retirement.

My focus will on how you can increase your financial well being over time.  Once you are at a financial circumstance that you are satisfied with, the conjoined issue is maintaining your financial fitness.

My best metaphor for financial fitness is that is is much like physical fitness.  No crash diets, no extreme workouts, rather ongoing consistent caloric monitoring and diligent rigorous working out wins the game.

The more disciplined you are with your money and the more you invest in yourself and your business and/or professional efforts will very likely payoff in time. Nose to the grindstone and all that stuff.

When I see a Mercedes or a Rolex, I also see just that much less which could have possibly been invested in another area with very likely higher monetary, emotional or spiritual returns. Ok, so I am a judgmental jerk 🙂

Nothing wrong with having some nice things.  Likewise nothing wrong within within one’s means even if that means even if that means wearing a Seiko and driving an older Honda.

Finally, being financially fit is a part of a greater goal.  Being a deceit caring loving human being wins the game.