Asset Allocation – Who Are You Investing For?

It’s been widely publicized  that  a principal  determining factor  in the volatility  and return  of an investment portfolio is the portfolio’s asset allocation. The Financial Industry  Regulatory Authority (FINR A) defines “asset  allocation” as follows: 

“Dividing  your assets on a percentage  basis among different  broad  categories  of investments,  including stocks, bonds,  and cash. Asset allocation is a strategy for reducing  the risk associated  with investing. Since your portfolio is spread  among different  asset classes, it’s less likely that  they will all perform  badly at the same time. Finding the right mix of assets depends  on your age, your assets, your financial objectives and your risk tolerance.”

Financial advisors often cite the results from a study published in 1986  “Determinants of Policy Performance,” by Brinson, Hood and Beebower, which concluded that 93.6 percent  of the variation of returns is explained by a portfolio’s asset allocation policy. While the findings of this study have been debated,  specifically the actual degree to which asset allocation drives an investment portfolio’s outcome, there’s agreement that, regardless of the actual percentage, asset allocation plays an essential role in determining an investment portfolio’s return.

This definition refers to a number of factors that should be taken into consideration when choosing an appropriate allocation. These include:

• Risk Tolerance

• Financial  Objectives

• Current Assets (need to diversify)

• Age (time frame assets will be invested)

There are, however, a number of additional factors that should be considered:

 • Taxation

• Liquidity

• Beneficiary

Most  people recognize the first six factors  listed above. The higher risk one is willing to take, the higher the potential return will be. The appropriate mix of stocks, bonds,  and cash will depend  on other  assets you currently own.  Some investments  may be appropriate for short-term goals, while others  are better  suited for long-term  financial  goals. Some investments create income that’s taxable at ordinary income tax rates, some create long-term capital gains which may be taxed at lower capital gains rates, and some investments produce tax-free returns.  And finally, there are investments that restrict  access or are difficult to liquidate, while others are highly liquid.

However,  the final factor—who will benefit from your investment  success or suffer from your investment  losses—is often overlooked. Considering whom  you are investing for is an important element in determining how to position  your discretionary financial  resources.  If these funds are going to be used to pay for a child’s college education, you’re investing for the benefit of the child. If the funds are meant to provide  income when you and your spouse retire, you’re investing for the benefit of yourself and your spouse. If you have established  a private  foundation, the funds you have contributed will eventually  benefit charitable organizations and/or  individuals  in need.

The FINRA definition refers to three broad categories  of investments—stocks, bonds  and cash. The characteristics of a cash position  include very low investment  risk levels, high accessibility, and relatively low returns.  Examples of cash investments include bank  accounts, money market  funds, and certificates of deposit.  Bonds are characterized by low risk of principal (depending  on the grade of the bond  issued), higher expected  returns than cash and income that may be tax-free (depending on bond  type).

There  is, however,  another asset that  combines  the advantages of cash investments  and bonds,  provides  a number  of other unique advantages and is particularly well suited when the funds are being invested for the benefit of future generations (children, grandchildren, etc.) life insurance.  Advantages  of a cash value life insurance  policy include:

• Builds cash surrender values which are readily accessible

• Cash values grow on a tax-deferred basis and, when properly  designed, may be distributed tax-free

• If structured correctly  the death  benefits are received income and estate tax free

• Potential  for higher growth  rates than  cash positions

• Low risk to principal

• Death  benefits may be easily split up between  heirs

• In many states, life insurance  cash values and death  benefits are protected from creditors  by statute

• Beneficiaries receive a highly liquid asset (cash)

• Provides  financial  protection from the premature death  of the investor—protects the individual(s)  the investments are intended  to benefit.

When the intended  benefactors of your investment decisions are your children or grandchildren, it’s important to consider  the issues that may arise out of the particular assets that  make up your estate will consist. Consider  the following:





•      Some children involved in business, some are not, family strife almost always results when children who are not involved in the business receive ownership.

•      It is a difficult asset to value

•      If the children not involved in business the death of the owner may cause a fire sale at substantially discounted price.


Commercial Real



•      One child may need cash and wants properties sold, while other child understands it may be a bad time to sell

•      Downturns in the real estate market are a risk

•      Heirs are responsible for maintenance, insurance costs and real estate taxes until property sold

•      Heirs subject to legal risks as property owners.


Marketable Securities


•      During your life, they are subject to market risk.

•      Marketable securities are a liquid asset and potential target for creditors.


Second Residence


•      One child may want to retain the property, another child may want to sell it.

•      The property may hold sentimental value.

•      Heirs are responsible for maintenance, insurance costs, and real estate taxes until sold.

•      Heirs subject to legal risks as property owners.


Farm / Ranch Land


•      Land valuable on paper, but doesn’t generate sufficient income for upkeep.

•      Maintenance costs and real estate taxes may be substantial.

•      Land may be more valuable if developed, but heirs may disagree about whether to maintain it as ranch land or to receive the highest price.


Qualified Retirement

Plans / IRAs


•      These are subject to both estate taxes and income taxes upon the death of participant, depleting the asset by as much as 60 percent to 70 percent.

Life insurance  may be used as a wealth transfer  tool to accomplish many goals—protecting your children from mismanaging their  inheritance, avoiding family strife after  your  death, avoiding  probate and protecting the inheritance from creditors.  It also provides the perfect asset (cash) at your death, should your heirs need liquidity.  Life insurance ensures that your heirs receive exactly  the amount you want  them to receive, when you want  them  to receive it. It provides an asset that avoids  the family strife that  often  arises out  of receiving property, such as commercial  real estate,  vacation  homes,  personal  residences and closely held businesses.

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