A Revised Asset Allocation Yields More Benefits

By: Paul H. Glass, CPA


If so, you should investigate a strategy that can reduce your taxes, diversify your holdings, grow your estate, fund your charitable interests and protect your assets.

Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, cash equivalents, real estate, precious metals, other commodities, and private equity. Investments in these asset categories typically have category-specific risks. Before you make any investment, you should understand the risks of the investment and make sure the risks are appropriate for you. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.

When it comes to investing, risk and reward are inextricably entwined. The phrase “no pain, no gain” comes close to summing up the relationship between risk and reward. All investments involve some degree of risk. It’s important that you understand before you invest that you could lose some or all of your money. The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long-term horizon, you are likely to make more money by carefully investing in asset categories with greater risk. On the other hand, investing solely in cash equivalents may be appropriate for a financial goal with a short-term horizon.

The practice of spreading money among different investments to reduce risk is known as diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain. Diversification is a strategy that can be neatly summed up by the timeless adage “Don’t put all your eggs in one basket.” The strategy involves spreading your money among various investments in the hope that if one investment loses money, the other investments will more than make up for those losses.

Recently, we pointed out to a family that their 20 million dollar estate was arguably not properly balanced; the fact was that their investment holdings were comprised only of real estate. Further, this real estate was low-basis/high value, including large prospective tax liabilities. We suggested a strategy that would reduce their taxes, diversify their holdings, grow their estate, fund their charitable interests and protect their assets. In short, the family adopted a “Leave a Legacy” program that will enable them to potentially realize significantly more over time (i.e., 3 times more) than taking no action, while growing the family’s estate AND funding its charitable interests. The basic program steps involve the funding and formation of (1) a private foundation, (2) a donor’s tax savings account, and (3) a revocable life insurance trust to hold insurance purchased with premium financing. Much like a leveraged real estate acquisition, a financed life insurance policy can greatly increase the return on investment.

Paul H. Glass, CPA, is a California licensed certified public accountant, real estate broker and life insurance agent.
You can reach him at [email protected]
Notice: The author and publisher disclaim all liability for any loss or injury resulting from the use of the information found in this article. Every reader is advised to seek competent independent professional advice with regard to any contemplated use of such information.