Unless you’re already a finance geek, you probably looked at today’s article title and went “huh?” No worries, it’s not as bad as you think.

Two of the primary considerations with investing are asset allocation, and asset location.

At a high level, asset allocation is your willingness to ride the roller coaster and ability to handle volatility without trying to jump out mid-ride (risk tolerance). It’s also diversifying your portfolio across a variety of types of investments, such as US stocks, international stocks, REITs (real estate investment trusts), large cap and small cap stocks, growth and value stocks, bonds, etc.

Asset location is holding your investments in locations that make the most sense given their characteristics. This is like putting the infant in the infant car seat, the preschooler in the 5 point harness high backed booster, and the grown up in the drivers seat. So your highly appreciating assets go in Roth accounts (eg your small cap value goes into a Roth IRA), while your REITs (which are taxable as ordinary income) don’t belong in your regular taxable investment accounts, those would be in your traditional 403b instead.

Householding is looking at the big picture. Let’s lay out an extreme example to help paint this picture. Imagine you and your spouse have a 401k and a 403b, and they are of comparable size. The 401k has a great international fund, but no good domestic stock fund. And the 403b has a great domestic stock fund, but no good international fund. Does it really make sense to force each of these retirement accounts to your household’s desired 50/50 overall asset allocation of domestic/foreign stocks? Probably not. Instead, the 401k would be invested in the international fund, and the 403b would be invested in the domestic stock fund.

iRebal is a great tool many advisors use, it’s been available since 2004, so many a year now. They are available to any financial advisor or investment manager custodying their assets with TDAmeritrade (and now that Schwab bought TDAmeritrade, it will be available to those on the Schwab platform too!), which as of 2019 included 24 million brokerage accounts and $5 trillion in client assets. They have the largest market share among rebalancing and portfolio management tools. It allows householding of investment trading and rebalancing.

Why am I singing the praises of this software? Only in order to be able to point out that despite their broad market reach, and duration of time available in the market, only 10% of their users (advisors) utilize its ability to manage household-level asset rebalancing, the other 90% do their trades and rebalancing per account. Which also means only 10% of their advisors utilize household-level asset allocation and asset location. Assumedly therefore less than 10% of all US advisors are considering the household level.

Why do so few advisors utilize this foundational strategy? Two reasons.

• First, because they believe they haven’t had enough access to tools like iRebal.
  • To me, that sounds like “well, we knew all about the advantages of taking statins, but we didn’t want to put in a new order for statins with the pharmacy instead of our old non-statin meds because changing the paperwork was too hard.”
• And second, because it requires more communication with clients up front. Otherwise advisors get push back from clients when spouses have different returns (because the way the government handles retirement accounts those are titled under just one name).
  • To me, that’s like saying “well, we painted the walls in our house with whichever paint can was closest to the painter at the time, because we didn’t want to have the discussion ahead of time that the green went into the kitchen, the blue in the bathroom, and the yellow in the living room.” So now we do indeed have yellow paint, blue paint, and green paint, but each room got a splotch-work higgledy-piggledy paint job instead of a planned paint job.

You operate with a household budget, a household investment policy statement, a household estate plan, a household risk tolerance, a household tax return. But do you have a household asset allocation? And are your assets logically placed so as to be household-level tax efficient?