The FI Mastery Podcast

Asset Location vs. Asset Allocation: The Winning Formula for Wealth

May 04, 2023 Peter Donisanu
The FI Mastery Podcast
Asset Location vs. Asset Allocation: The Winning Formula for Wealth
Show Notes

Have you ever wondered why your savings aren't growing even though you're contributing to an investment account? It may be because you haven't set your investment strategy.
That's what happened to Mariam.

Now, Mariam knew the importance of investing and that her bank account wouldn't cut it when it came to satisfying her long-term financial independence goals. But, like many uninitiated investors, Mariam misunderstood the concept of investing and believed that simply opening an investment account would guarantee high returns.
Sound familiar?

Well, in Mariam's case, she opened a Roth IRA, because that's what she's heard she's supposed to do. In fact, Mariam believed that her Roth IRA was all she needed, not realizing that the account itself was just a vessel for her investment strategy.
And how many of us have ever made that same mistake?

Well, everything changed when Mariam discovered that her Roth IRA wasn't performing as well as she had hoped. And it turns out that her account was all sitting in cash and not actually invested. That's when she realized that she had focused too much on the account itself and not enough on the underlying investment strategy.

So, what did she do?

Well, frustrated with her situation, Mariam took the time to track down resources and professional assistance that helped her discover that focusing solely on her Roth IRA may not have been a solid strategy from the start. 

To be sure, Mariam discovered that the key to a solid investment strategy begins with putting her savings not only in suitable buckets, but also in choosing an ideal mix of stocks, bonds, and other assets that align with her near- and long-term life and savings goals.

Now, with a renewed sense of confidence, Mariam implemented her new investment strategy. And it was at that point that she knew she was making informed decisions and using all available savings vehicles, like her brokerage, employer retirement plan, and her IRA in an orderly manner. 

So, what's the moral of the story here? Well, to build real wealth, it's essential to not just put money in an investment account, but also to understand the difference between asset location (that's the types of investment accounts) and asset allocation (or your investment strategy) and use them effectively within your overall financial plan. 

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