Investment and tax planning – more specifically asset allocation and tax-efficient investing – are important parts of a well-designed, customized financial plan and integral to growing and maintaining wealth. In the first article of our financial planning series, we talked about data gathering, goal planning, and gathering relevant documentation as part of a financial plan.

Asset allocation is an investment strategy that allots a portfolio’s assets into different asset classes (stocks, bonds and cash equivalents) according to an individual’s risk tolerance, financial goals and time horizon. The collection, or allocation of investments owned may be the most important determinant of return given the amount of risk taken. It’s important to remember that there is no “correct” asset allocation for everyone, the best allocation for an individual depends on your comfort level and ability to meet your financial goals.

Since all investments have risk, the balance between risk and reward can be managed through portfolio holdings and diversification. Building a diversified portfolio includes looking for assets whose returns haven’t historically moved in the same direction. Therefore, even if a portion of the portfolio is declining, a portion is hopefully growing. Broad diversification reduces a portfolio’s risks while providing opportunity to benefit from the markets’ best performers. At Callan, process we’ve developed a process for investors to stay the course and remain disciplines through market volatility.

Tax efficient investing is an important driver of portfolio return as well as an integral part of financial planning. Under the umbrella of tax efficient investing, you can consider tax loss harvesting, asset location and use of exchange traded funds (ETFs).

Tax loss harvesting involves selling securities in the portfolio at a loss to offset gains and income. If you know specific realized gains incurred in a year, you can actively seek securities to sell at a loss to offset those realized gains. By reducing capital gains, taxes are lowered while maintaining an expected level of risk.

Asset location involves placing tax inefficient assets (like taxable bonds) in qualified retirement accounts (IRA, IRA Rollover, Roth IRA) and tax efficient assets (like stocks) in taxable investment accounts (like a joint or trust account). Tax inefficient assets like high-yield bonds generate income on an ongoing basis that is often taxed at a high income tax rate. Thus, it makes sense to put these types of assets in a qualified retirement account that is not subject to immediate taxes, so the tax liability is deferred (or negated in the case of a Roth IRA) for the investor. Tax efficient assets like equities produce a capital gain and can potentially qualified dividends that is taxed at a lower rate (0-20% plus state taxes, if applicable, depending on income). Therefore, it is beneficial to place these types of investments in an account that is subject to taxes.

Both tax efficient and inefficient assets may be an important part of any well-diversified portfolio, but serve an investor best in a specific type of account within a portfolio. While tax implications shouldn’t be the primary driver of investment decisions, being smart about locating different assets for tax purposes can provide a tailwind to long-term returns.

ETFs provide certain tax benefits over building a portfolio of single stocks or mutual funds. ETFs typically have lower capital gain distributions than a mutual fund and are often payable only upon sale of the ETF, while a mutual fund passes capital gains to investors through the life of the investment. Other non-tax related benefits to ETFs include trading flexibility, low trading costs and portfolio diversification.

The peace of mind offered by a well-constructed financial plan is invaluable to help clients navigate periods of market volatility and place them on a long-term strategy for financial success. Through the financial planning process, clients gain clarity, direction and discipline.


Disclaimer: * Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at