December 1, 2005 — The main objective of portfolio structure is to help you attain your investment goals in a variety of economic environments. A properly diversified portfolio may better withstand unexpected inflation, deflation and other economic and political shocks to the global financial system. In order to attain this resiliency, the asset classes selected for a portfolio should derive their returns from fundamentally different economic factors. This quarter we will summarize the key benefits of the six asset classes utilized in a diversified portfolio. The fourth quarter is also the time to evaluate proactive income tax management strategies that can enhance investment returns in taxable accounts.

A properly diversified portfolio should include investments in six distinct asset classes. The U.S. Large Cap Equity asset class helps provide inflation protection, enhances returns, and provides a moderate dividend cash flow. The U.S. Small Cap Equity asset class provides enhanced returns, inflation protection, and diversification. The International Equity asset class enhances returns and industry representation, and it provides foreign currency exposure and moderate dividend cash flow. The Real Estate asset class helps protect from inflation, provides cash flow and helps with diversification though its low correlation to equities and fixed income. The Alternative Investments (commodities) asset class, when mixed with equities and fixed income, provides risk reduction as well as an inflation hedge. The Fixed Income (bonds) asset class provides insurance and risk reduction, hedges against deflation, and provides diversification through low correlations to equity returns in times of financial market trauma. It also provides cash flow.

With the end of the year approaching, it is important to take advantage of tax-planning strategies in your current investment portfolio. Any dollar spent on income taxes is that much less that can be utilized to meet your future spending needs. Although dollars spent on income taxes directly reduce investment returns, they often go unnoticed since taxes are usually paid separately from the investment portfolio. There are two strategies to consider: selling loss positions to offset realized taxable gains; and deferring taxable gains until the asset is held one year or longer in taxable accounts. Both these strategies can be powerful tools to increase your portfolio's after-tax returns.

Global financial markets fluctuate. A sensible investment strategy can help protect your investments from the brunt of these fluctuations. Active income tax management around a personalized asset allocation can be a powerful source of enhanced after-tax returns.  Having an asset allocation strategy and a properly diversified portfolio will help you stay the course over the long term, regardless of short-term market behavior and economic and political swings. Investment discipline and proper portfolio structure are key tools to help protect your current and future lifestyle. Consult your financial advisor to explore tax-saving strategies you may be able to implement for 2005.  

Article courtesy of Scott Summerford, CPA, CFA, CFP®, ChFC, CLU , ClMA, Asset Management and Tax Planning Director, 1st Global 

For more information, call Vicki Dworski at 215-564-1900.

Securities offered through1st Global Capital Corp. Member NASD, SIPC. Asher Financial Advisors, LLC is not affiliated with 1st Global Capital Corp.

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