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Reuters Insider - Proper asset location boosts investment returns, says John Vento

Wed 1st May, 2019 9:52am
Click the following link to watch video: https://share.insider.thomsonreuters.com/link?entryId=1_47r2gxeh&referenceId=tag:reuters.com,2019:newsml_OVACNL3M3_930&pageId=ReutersNews
Source: Reuters Insider

Description: HD Vest advisor John Vento explains how "location, location,
location" helps cut taxes and boosts investment returns in an interview with
Reuters' Fred Katayama.
Short Link: https://reut.rs/2GTb6DM

Video Transcript:

Wall Street paring its losses, Tuesday afternoon on this final trading day of
April. Right now, we got the S&P 500 just below the breakeven point. The
NASDAQ down 0.7%. Well, let's get some market views and also some tax
strategies, some tax tips from John Vento. He is an advisor at HD Vest. He is
also the author of this book, Financial Independence. I read a few chapters,
it's very comprehensive. Hopefully, it gets some of the tax strategies and
listen to that book today. Well, first off John, before I begin, let's take a
look at the markets. Spending much of the day in minus territory, this is just
before the start of May and also ahead of Apple's earnings so what's the
culprit today that's putting a downer?

Well, I think yesterday as we all know, the S&P, the NASDAQ hit an all-time
high so today we're just taking a little bit of a breather. You know, I tend
not to focus on day-to-day activity. I look at the big picture when it comes
to investing and I still am very, very bullish about the market. I typically
track 12 leading economic indicators that will tell us whether a recession is
coming and right now, only one of them is negative. Three of them are on the
cautionary side so overall, I'm still very bullish that this expansion is
going to continue. So I would continue investing and not shy away from the
market, at least not yet.

All right. Now tax season is over now. I think that's April 15. Financial
advisors often talk about proper asset allocation and rebalancing. But you say
that's not enough. It's also about asset location. So tell us about that and
how much you're able to boost your return as results to proper location.

Sure, absolutely. And it's funny, in the real estate business, we always hear
about location, location, location. I'm going to reiterate that again. When it
comes to investing, it's all about location, location, location. So just to
give you a simple example, if you have a traditional IRA, a Roth IRA, and then
a non-retirement account, you need to be very careful about which investment
asset you'd put in each of those particular account types. The reason is the
tax law will treat those investments differently. So just as a quick example,
municipal bonds we know, clearly, municipal bonds, if you buy one that's
within your state, triple tax free. Terrific investment, clearly you want to
keep those in non-retirement accounts to get the benefit that. But to add a
twist to it. If typically what we do is we're going to compare a corporate
bond to a municipal bond. Assuming you're in a 50% tax bracket, you live in
New York city, high income state, what are we looking at? An 8% corporate bond
after tax return? Maybe you're going to make 4%. That municipal bond is making
4% before an after tax. It's really a split decision. But what if I could tell
you I have a way where you could double your rate of return, your after tax
rate of return. The simple solution is buy that corporate bond but buy it in
your rough IRA account. By placing that bond in the right account type, you
are now generating a double-digit but twice what you would have earned
otherwise in the example I just gave.

What about in fixed income such as treasuries?

Right. Well, fixed income, same thing. Fixed income, CDs, any fixed income
type of security that does not get any preferential tax trim. What that means,
you're going to pay tax at the highest possible rate on that income. So where
do we want to put those assets? We want to put those in retirement accounts,
why? Because the retirement accounts will make that income tax deferred. So
you'll avoid paying taxes on that income for many, many years well into your
retirement years as well. Another hidden benefit that a lot of people don't
realize with that is you're also paying the Medicare taxes, a 3.8% Medicare
tax on ordinary income that you're paying on your interest income. That will
not apply once you take distributions out of your retirement account. That
change alone is a 3.8% difference but even better, you're not paying tax in
that tax-deferred account. So now you're going to earn money on your money and
on the money you didn't have to give up to the government. In the long run
when you focus on asset location, you could dramatically increase your rate of
return.

Let's say you've got multiple accounts, you've been with other employers,
you've got your current company's 401(k) but you also have your personal
portfolio or you have multiple financial advisors. What's the simple answer
there?

Right. Well, the simple advanced answer there is you really need one trusted
advisor and the reason I say this is that too many cooks in the kitchen will
spoil the broth. And what I mean by that is if you came to me and I'm vesting
only your retirement money, chances are, I'm going to give you that 70-30
asset allocation to your overall money invested with me. The advisor down the
street that's investing your non-retirement money, he's probably going to do
the same thing. So by working with one trusted advisor who could take a look
at your complete comprehensive picture, then and only then could you truly
take advantage of this tax strategy which is in my opinion, extremely
important. We all know you should never make investments strictly based on the
tax consequences of it, based on taxes but if you're not looking at the taxes'
consequences, you're robbing yourself of the maximum rate of return given that
risk level.

We should talk about tax efficiency.

Absolutely.

All right. In 70-30, you're going to be 70% stocks, 30% bonds. 

Right, just a hypothetical allocation.

Okay, thanks a lot John for those strategies and tips.

My pleasure.

Our thanks to John Vento of HD Vest. I'm Fred Katayama and this is Reuters
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