Three simple things that will enhance your investment returns
Finding a comfortable way to earn a higher return on your money can be challenging. But improving your financial performance may be less difficult than you think. Check out these three simple things that you can do to enhance your investment returns and prevent yourself from making costly mistake.
Don't ignore the impact of fees
Most investors are unaware of how strongly fees can affect the the long-term growth of their portfolio. Higher costs can stifle your portfolio’s growth significantly. Consider a $10,000 investment held for 30 years earning a 6% average annual return with an expense ratio of 2%.:
The projected value of this investment after 30 years is $31,330. Though in this time, an estimated $11,654 is lost to operating expenses and approximately $14,451 to opportunity cost (i.e. total earnings that you would have made if your sales charges, operating expenses, fees and commissions had been invested) is forfeited as well.
If you decrease the expense ratio to just 1%, your projected value increases to $42,485, and theoperating expenses and opportunity cost are reduced to $6,970 and $7,980.
As you can see, lower costs give investor’s a greater share of the investment’s actual return. And because there is no indication that higher costs lead to better performance, minimizing cost is critical to increasing your potential for greater returns.
Invest more when markets dip
Market volatility makes both new and seasoned investors uneasy. When markets are declining, our first instinct is likely to protect our money and pull out. Being a disciplined investor, however, largely involves suppressing your basic human nature.
As the great Warren Buffet once said, for an investor ‘it would be wise to be fearful when others are greedy, and greedy when others are fearful’. Share price tend to increase when there is greater demand, leading investors to overpay. On the other hand, when share prices fall, investors tend to be fearful and demand is lower, which presents a good value buying opportunity.
When markets take a dip, what you should do is what feels hardest - check-in less on the value of your portfolio and performance, and invest or deposit more. As long as your investments are in line with your time horizon, then a market correction is not likely going to prevent you from achieving your goals.
Employ tax strategies
When it come to enhancing returns taxes play an important role. As the saying about income goes, ’it’s not what you make, but what you are able to keep’. Nearly every investment decision has subsequent tax implications. To minimize the tax you pay now or in the future, you will need to explore effective tax management strategies when you invest.
For starters, allocate and build investments strategically among taxable and tax-advantaged accounts. Holding your investments in different savings vehicles based on tax treatment can add value during the wealth accumulation phase of your life by allowing you to defer taxes while benefiting from compounding growth or avoiding tax entirely in some cases.
Diversification among your counts is also valuable during the distribution phase of your retirement years. When it is time to turn your assets into income, you can manage your income tax bracket with greater flexibility by choosing which accounts to withdraw from.
Whatever your personal financial situation is, there will be several investment strategies available to you that can help you minimize or control the amount of tax you pay and keep more of the money you’re making.
Investing can be complicated but it does not have to be. As you can see here there are several simple tools that have been successfully used over time to improve portfolio performance and enhance returns.