Asset Location

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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Park
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Asset Location

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When I started to learn about investing, common advice regarding asset location was to put your bonds in your tax advantaged space and your stocks in our taxable space. This was due to the fact that interest tends to be taxed more heavily than dividends or cap gains. That strategy emphasizes relative amounts of taxed saved.

More recent advice suggests that one could consider the opposite: keep stocks in your tax advantaged and bonds in taxable. This strategy emphasizes absolute amount of tax saved. Interest from bonds may be heavily taxed, but if bond yield is low enough, the total tax on stock return may be greater than the tax on the total bond return.

Another school of thought emphasizes liquidity. You want some bonds in your taxable account, because if you have an unexpected need for capital, the probability of paying cap gains tax is higher with stocks than bonds.

A fourth strategy focuses on rebalancing. Here, you keep part of each position in your taxable and your tax advantaged space. If you rebalance and sell at a loss, do it in your taxable space, as you can apply the cap loss against any cap gains. If you rebalance and sell at a gain, do it in your tax advantaged space, to minimize cap gains tax. Since cap gains/losses tend to be less of an issue with bonds, it's more important to have part of each stock position in both your taxable and tax advantaged space. Even if one ignores what is written in the last three sentences, rebalancing tends to be easier with a part of each position in both taxable and tax advantaged accounts.

About the fourth strategy, you need a large enough portfolio to justify the increased commissions associated with trading in both tax advantaged and taxable, as opposed to one of them.

I got the last strategy from the book "Smart Portfolios" by Robert Carver.

He also makes the case that when it comes to periodic rebalancing, don't do it at the end of the year. Why? Because that's when it's commonly done, and it can create distortions in prices. I"m not agreeing with him totally on this point, because from a tax point of view, it can make sense to trade at the end of December and beginning of January. A compromise would be to rebalance at a time other than the end of the year, but leave the option open for rebalancing at the end of the year, if advantageous for tax planning.
BRIAN5000
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Re: Asset Location

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fourth strategy focuses on rebalancing. Here, you keep part of each position in your taxable and your tax advantaged space. If you rebalance and sell at a loss, do it in your taxable space, as you can apply the cap loss against any cap gains. If you rebalance and sell at a gain, do it in your tax advantaged space, to minimize cap gains tax. Since cap gains/losses tend to be less of an issue with bonds, it's more important to have part of each stock position in both your taxable and tax advantaged space. Even if one ignores what is written in the last three sentences, rebalancing tends to be easier with a part of each position in both taxable and tax advantaged accounts.
Hard to get it correct in practice easy to write in a book, I think it's a great idea but unworkable.

Example - I had/have both BMO and TD in both non registered and a TFSA. My Financial allocation is more than I want so I need to lighten up. In non-registered account they are both a double with no more capital losses available. If I sell them both in my TFSA that leaves my TFSA all cash no growth.
I can sell them once in my TFSA but what do I do with the cash? What do I do the second time? Broad based ETFs would be easier.

In the states they have lIFO I suggested buying say XIC for five years the the next five buying VCN creating your own lIFO situation. If you need to rebalance you could then sell VCN less capital gain similar to using like ETFs for tax loss selling. Idea was poo poo'd on here but at least it wouldn't desecrate a TFSA but would sure increase complexity.
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
Park
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Re: Asset Location

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Park wrote: 30 Jan 2018 14:40
A fourth strategy focuses on rebalancing. Here, you keep part of each position in your taxable and your tax advantaged space. If you rebalance and sell at a loss, do it in your taxable space, as you can apply the cap loss against any cap gains. If you rebalance and sell at a gain, do it in your tax advantaged space, to minimize cap gains tax. Since cap gains/losses tend to be less of an issue with bonds, it's more important to have part of each stock position in both your taxable and tax advantaged space. Even if one ignores what is written in the last three sentences, rebalancing tends to be easier with a part of each position in both taxable and tax advantaged accounts.
Another strategy of asset location, that focuses on rebalancing, is to have your higher volatility assets in your tax advantaged space. Higher volatility assets, like stocks, will tend to produce more cap gains. So keep them in your tax advantaged space. That's from the same book by Carver.

If you are directly investing in stocks, I'm not sure that I agree with this advice. In your tax advantaged accounts, you can't take advantage of capital losses. And if you invest in stocks directly, that will happen. Over time with successful stock picking, this strategy makes sense. If you're investing in stock ETFs for an appreciable period of time, it makes sense. With such investment products, there won't be many cap losses to utilize.

So asset location strategies can be driven by tax efficiency, liquidity or risk management (rebalancing).
Park
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Re: Asset Location

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Park wrote: 30 Jan 2018 14:40A fourth strategy focuses on rebalancing. Here, you keep part of each position in your taxable and your tax advantaged space. If you rebalance and sell at a loss, do it in your taxable space, as you can apply the cap loss against any cap gains. If you rebalance and sell at a gain, do it in your tax advantaged space, to minimize cap gains tax. Since cap gains/losses tend to be less of an issue with bonds, it's more important to have part of each stock position in both your taxable and tax advantaged space. Even if one ignores what is written in the last three sentences, rebalancing tends to be easier with a part of each position in both taxable and tax advantaged accounts.
The above strategy would work, if you're using individual stocks with appreciable turnover. But if for example, you're a long term buy and hold ETF investor, there shouldn't be much capital losses to harvest with time. In such cases, the above strategy may be less relevant to you. However, rebalancing would be easier, with a part of each position in both taxable and tax advantaged accounts.
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