What Every Investor Should Know About Asset Allocation Across Multiple Investment Accounts

Do you have several investment accounts? You’re not alone.

Many of us have multiple investment and savings accounts. You may have a rainy day fund, a 401(k) plan, an investment account for “playing the market,” and so forth.

And that’s fine.

Different investment goals require different “locations,” so having multiple accounts is not a bad thing – as long as they’re optimized for the right goal.

So here’s the big question: How should you allocate assets across multiple accounts? Is there a single allocation strategy that gets applied universally? Or should you have a different allocation policy for each account?

Asset Allocation Focuses on Return, Risk

Asset allocation is likely to have the biggest impact on your future portfolio performance, so it’s important to get it right.

At the heart of every asset allocation decision are two fundamental questions:

1. What are my return goals? How much am I going to need? When am I going to need it by?
2. How much risk am I willing to take on in pursuit of these return objectives?

Answering these two questions will help you set the target weights for each asset class represented in the portfolio.

What does that mean?

An “asset class” is a group of assets that share a common trait – such as U.S. stocks, foreign bonds, etc. Each asset class has its own general risk/return profile.

You’ll want to “slice the pie” – i.e. choose “target weights” – between various asset classes, depending on your own goals, risk tolerance, timeline, and other factors.

As you can probably already tell, a “one size fits all” approach is not going to work.

Use an online tool like Jemstep’s Portfolio Manager to come up with a custom-tailored asset allocation that fits your account structures, goals, age, risk tolerance and other individual factors. It will issue recommendations that take into account the fees and tax structures associated with all your accounts.

If you’re in your 20s or early 30s, your retirement plan should probably have a large helping of equities in the allocation mix. You have many years before retirement, and can afford to endure some of the ups and downs of the market in the short term, in exchange for a higher potential for long-term growth.

Your rainy day savings fund, on the other hand, needs to be more liquid and accessible since you don’t know when that rainy day will come and need to be prepared.

Don’t Forget About Taxes!

Taxes should not drive your investment decisions.

But you should take income and capital gains taxes into account when deciding which account should hold which assets.

The presence of significant tax benefits in qualified accounts like IRA’s and 401k’s makes this a less important consideration.

But in taxable accounts you want to minimize “tax triggers” to the extent possible. If one of your accounts is a “play the market” investment account, beware the effect of short-term capital gains. Short-term gains (less than one year) are taxed at a higher rate than long-term, and they can rapidly deplete whatever gains you think you will earn from your trading strategy.

Stay Disciplined in Your Investment Accounts

Regardless of which asset allocation strategy you pursue, stay disciplined. Your allocation mix should only change gradually over time as you get closer to your goal.

Annual rebalancing is an important part of this discipline. Rebalancing keeps your portfolio in line with prudent allocation weights, and will likely put you in a better position to achieve your goals. Portfolio Manager can give you rebalancing reminders, as well as specific buy-and-sell instructions to walk you through rebalancing.

Multiple investment accounts are to be expected for investors with different and distinctive goals. Make sure your asset allocation strategy is the right one for each goal, taking into account the return objectives and risk considerations associated with that goal.

Do you have multiple investment accounts? What’s your approach to asset allocation?