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The Financial Impact of Asset Allocation and Tax-Efficient Investment

Spring is almost here, and with it comes the opportunity to maintain your current botanical pursuits and add new plants for the future. Using that theme, consider asset allocation as designing the garden layout. You decide where to plant your vegetables, flowers, and herbs, aiming for a bountiful crop that thrives across various seasons. 

Just as you place sun-loving plants in bright spots and shade-lovers under trees, in simple terms, asset allocation involves distributing your investments across different asset classes—stocks, bonds, real estate, and alternative investments—based on your financial goals, time horizon, and risk tolerance. 

As Austin portfolio managers, we understand the importance of having a well-balanced portfolio nurtured and cultivated regularly to weed the garden and acquire new assets that can enhance the beauty of your property. 

The goal is a well-rounded investment “garden” that grows steadily over time, regardless of weather, pests, or other conditions that negatively impact the pursuit of your goals. 

Incorporating Tax-management practices is like using compost and mulch in your garden. It’s about managing your garden in an attempt to enhance growth and manage risk simultaneously. By choosing tax-efficient investments, you can help ensure that more of your investment “return” ends up in your pocket and is not eroded by any more tax payments than necessary. 

In today’s blog, we’ll dive deeper into how strategic asset allocation and tax-management investment strategies can work together in an effort to improve your financial results.

 

The Role of Asset Allocation in Your Retirement Planning Process

Asset allocation plays a role in your retirement planning by balancing risk and reward based on your retirement timeline, risk tolerance, and financial goals. Asset allocation should be a dynamic process based on financial goals, risk tolerance, age, savings dependence, life circumstances, and market conditions – all financial situations are different, and the appropriate asset allocation may vary greatly depending on the investor. 

 

Listen to our Beckonomics podcast: “Market Update”

 

The Role of Tax-Efficient Investing in Your Retirement Plan

Let’s face it: taxes are a form of erosion. Every dollar of tax is one less dollar for your future use. Therefore, tax liabilities should be managed just like any other expense that impacts your net worth.

There are numerous tax-management investment strategies that you can deploy as a part of your wealth management plan. Each of these strategies can be tailored to your specific situation and goals so you can manage your tax liabilities the same way you manage other expenses that impact your wealth.

The following are a few of the more common tax minimization strategies that one can use: 

  • Maximize contributions to tax-advantaged accounts like Roth IRAs, traditional IRAs, and 401(k)s. These accounts offer tax-deferred or tax-free growth, allowing investments to potentially grow faster than if income and gains were subject to current taxation.
  • Tax loss harvesting involves selling investments that have lost money to offset the taxable gains of investments that have made money. Realized losses can offset gains and up to $3,000 of ordinary annual income, reducing overall tax liability.
  • Strive for long-term capital gains. Profits from investments held for over a year are subject to long-term capital gains tax, generally lower than short-term capital gains tax on assets held for less than a year. 
  • An asset location strategy can be another critical part of a successful wealth management plan. Investments known for their tax efficiency, such as index funds and ETFs, are often best held in taxable accounts. We believe high-yield investments, such as bonds or REITs that generate significant income, are best placed in tax-advantaged accounts like IRAs or 401(k)s. 

 

The Beck Capital Management (BCM) Approach

As portfolio managers in Austin, we have provided wealth management services to affluent individuals and their families for over 30 years. Our approach to asset allocation and tax-managed investing is based on our forward-looking outlook. 

  1. Customization and Agility: We like to keep individual stocks in our portfolio to help reduce costs and take advantage of any potential dips throughout the year. For instance, if a company’s value drops due to a short-term circumstance, we can sell it to capture a tax loss and then purchase it again after 30 days if we still like the company. This move isn’t something you can do with market index funds or ETFs without making drastic changes to your asset allocations. 
  2. Building Equity Positions: We believe it’s important to gradually build up your portfolio positions rather than buy something all at once. A staggered approach to purchases allows for additional shares to be purchased during any temporary market declines, and it creates separate tax lots for potential tax benefits in the future.
  3. Striving for Long-Term Tax Treatment: Most of the time, our goal is to hold onto investments for more than one year so that any profits are taxed at a lower long-term capital gains rate.
  4. Avoiding Tax-Inefficient Investments: We avoid investing in mutual funds that actively pass tax expenses to you. Even in a down year, there is a chance you would owe taxes with a portfolio of mutual funds. This can happen when the fund sells certain investments for a profit that were bought before you even started investing in the fund.

When you partner with BCM, you get a financial ally and a partner to help you navigate your financial journey. Connect to learn more about our asset allocation and tax-managed investment strategies.

 

 

This newsletter contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. 
Past performance is no guarantee of future results. Investing in the stock market involves gains and losses and may not be suitable for all investors. 
Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind. The information contained herein may contain information that is subject to change without notice.  Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor.
Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market.  They are methods used to help manage investment risk.
BCM does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.

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