In an earlier post, I explored how thoughtful asset location can improve the long‑term after‑tax return of a 3‑fund portfolio. As part of my ongoing experiments with modern AI tools, I decided to test how well they could recommend asset locations for the same sample $1 million portfolio.
The next section shows the exact prompt I used and the response generated by Google Gemini.
Prompt:
You are an experienced financial planner. I am getting ready to retire. My portfolio consists of the following accounts: Taxable $100,000, Roth IRA $50,000, Traditional IRA $850,000, Total $1,000,000. My desired asset allocation: Stocks 70% (20% of this in International stocks), Bonds 30%. I only want to use low-cost index funds and no actively managed funds. Please recommend which funds and what amounts should be placed in which account(s) i.e. taxable, Roth IRA, Traditional IRA to maximize long-term after tax return.
Response:
To maximize your long-term after-tax returns while maintaining your 70/30 asset allocation, you should prioritize asset location. This strategy involves placing less tax-efficient assets (like bonds) in tax-deferred accounts and high-growth assets (like stocks) in tax-exempt or taxable accounts.
Asset Allocation Strategy
Based on your $1,000,000 portfolio and desired 70/30 split (with 20% of stocks in international), your target amounts are:
Total Stocks (70%): $700,000
U.S. Stocks (80% of stocks): $560,000
International Stocks (20% of stocks): $140,000
Total Bonds (30%): $300,000
Recommended Asset Location
Strategic Rationale
Taxable Account (International Stocks): Placing international stocks here allows you to potentially claim the Foreign Tax Credit for taxes paid to foreign governments, which is lost if held in an IRA.
Roth IRA (U.S. Stocks): This account provides tax-free growth. By placing U.S. stocks here—which generally have higher long-term growth potential than bonds—you maximize the value of the tax exemption.
Traditional IRA (Bonds): Bonds generate interest income that is taxed at ordinary income rates. Holding them here defers those taxes until withdrawal, which is more efficient than paying annual taxes in a taxable account.
Filling the Gaps: Since your Traditional IRA is your largest account ($850k), it must hold the remainder of your U.S. and International stock allocations after the Taxable and Roth accounts are filled.
Execution Note
Rebalancing: It is easiest to rebalance within your Traditional IRA since selling and buying assets there does not trigger immediate capital gains taxes.
Low Costs: All recommended funds (VTI, VXUS, BND, etc.) have extremely low expense ratios (typically 0.03% to 0.08%), satisfying your requirement for low-cost index funds.
My Observations on the Prompt and the Response
As you can see, the prompt is simple and direct. It avoids technical jargon like “asset location,” while still conveying the key details about the responder (a financial planner), the requestor (approaching retirement), and the portfolio.
The response is similarly clear and direct, and even offers strategic rationale - despite my not explicitly asking for it. Importantly, its asset location recommendation aligns with the suggestions in my earlier post (see screenshot below).
I also ran the exact same prompt through Microsoft Copilot and ChatGPT. Neither produced the correct answer on the first attempt. They did get there eventually, but only after I pointed out both logical and arithmetic errors.
Related:
Disclaimer: This article is not intended to be investment advice. Consult a duly licensed professional for investment advice. The contents of this article are for educational purposes only and do not constitute financial, accounting, tax, or legal advice. Past performance is no guarantee of future results.
