Enhanced portfolio growth can change your life
What if you had the choice to retire earlier, spend more in retirement and not outlive your nest egg. How would you like to be able to own another home? Imagine building your legacy and leaving more money to your children, grandchildren or favorite charity?
I think it's safe to say everyone would like to realize these dreams. My job as a fiduciary and CERTIFIED FINANCIAL PLANNER TM is to help investors implement advanced financial planning and investment strategies that can help them realize these aspirations. By increasing tax savings and maximizing returns on investment, the probability of achieving these lifelong goals increases.
While every investor's investment and tax situation is unique, I do think its reasonable to think that by implementing more beneficial financial strategies, an investor can expect to add a minimum annualized return of 2% per year to their investment portfolios.
To illustrate the impact of these potential increased returns, I prepared the table below which shows starting and ending values of portfolios that were able to grow an additional 2% return per year for 5 and 10 years.
|Initial Investment||Hypothetical Annual Return||5 Years Investment Value||Net Gain with Added 2% Return||10 Years Investment Value||Net Gain with Added 2% Return|
How can you grow your portfolio an extra 2%?
The first thing you need to do is evaluate your financial service providers and investment managers by seeking a second opinion from a competent financial advisor. A financial professional who is held to the fiduciary standard is usually your best option since they are legally obligated to recommend products based upon the best interests of clients.
It's possible that you discover the need for professional help or may not be receiving the best advice for growing your assets. Even though your investment portfolio has likely been increasing in value there's a good chance you may be leaving money on the table.
Addressing this potential dilemma means you may have to be willing to go outside your comfort zone, make changes that ultimately will be in your best interests and hire a financial advisor that can help accomplish these goals. Here are a few things you can do to help grow your money:
1: Lower your advisory and investment fees
Fees are one of the easiest variables to control when creating an investment plan or selecting a financial advisor. Fees all have one thing in common, if the money is going somewhere else, it is not going to you. While paying for an advisor for professional advisory services can certainly be worth the cost, it's to your advantage to work with an advisor that charges lower fees.
One of the best ways to lower your advisory fees is to work with a Registered Investment Advisor (RIA). RIAs are independent, typically do not have the high overhead of a larger, traditional bank and generally have pricing autonomy. This means cost savings can be passed on to clients in the form of lower fees.
As an independent investment advisor, I have been able to provide fee savings for every investor who was previously paying to have their assets managed at a larger bank. Furthermore, clients that have chosen to work with us have received the added cost benefit of not having to pay any commissions or sales charges including with their 529 College Savings Plans.
Investment fees should also be minimized by using individual stocks, low cost exchange traded funds (ETFs) and institutional class share mutual funds. The lower your costs, the greater your share of an investment's return.
2: Maximize after-tax investment returns
Managing a portfolio for tax efficiency should be a major part of your overall plan and can add significant returns to a portfolio. Despite this, the majority of people I meet with are not familiar with the tax liabilities they incur on an annual basis with the management of their investment portfolio.
Dividends and income are taxed at different rates depending upon the investment instrument and your tax bracket. Mutual funds can distribute taxable gains and any realized sales can create tax liabilities if not offset by losses. Tax loss harvesting is a strategy that should be continuously implemented to offset any realized gains while also carrying forward losses to offset gains in future years. My previous post discussed why last year was a great year to book and carry forward losses.
The tax deferral benefits of tax sheltered accounts such as 401k, IRAs and Roth IRAs should be maximized on an ongoing basis. Distributions from accounts should also be managed to mitigate the tax implications of taxable withdrawals.
3: Increase returns on fixed income
One of the primary reasons why investors own fixed income is because they don't want to incur the risk of owning volatile asset classes like stocks. While fixed income traditionally has been an asset class that provides stability and income, downside risks have been increasing due to low interest rates and inflationary pressures. In fact, many bond funds are flat or negative YTD.
Investors need to be aware of the past and expected low returns of fixed income and should implement suitable alternatives. I have met with many investors who were not even aware they were paying their advisors to hold fixed income investments which are yielding a negative real rate of return after fees and inflation. The poor outlook for fixed income returns is one reason we have been using structured income notes for suitable client portfolios. My previous post highlighted how these investments can potentially provide double digit income streams with principal protection.
4: Asset allocation/security selection
The way you divide your portfolio among asset classes is the first thing you should consider when allocating investments, because it has the biggest effect on the way your portfolio will act. By choosing how to allocate your portfolio, you have a certain amount of control over the experience you'll have as an investor.
A good investment plan should not only help you "stay the course," but should balance the need for liquidity and future growth. This includes providing for strategic and/or tactical adjustments based upon economic, market and world events.
For example, last year investors should have added investments that would benefit from the Pandemic. This included cloud computing, biotechnology, consumer staples and ecommerce. A new Administration and stimulus spending created opportunities with electric vehicles, green energy and infrastructure. Meanwhile, disruptive technologies such as human genomics, autonomous driving, battery storage, artificial intelligence, blockchain technology and Fintech are the future.
I have met with many investors who have very little exposure to these investment opportunities or worse, work with advisors that have completely missed the opportunity with these investment themes and have not made appropriate adjustments since the start of the Pandemic. It is these investors that may have the most to gain by making a change to an experienced investment manager that will help make the appropriate asset allocations and security selection.
"A comfort zone is a beautiful place, but nothing ever grows there"
The numbers in the table above are real due to the nature of compounded investment returns. These numbers may also be conservative when considering the type (or lack thereof) of plan an investor may currently have in place. Yet, implementing changes can potentially provide for meaningful life achievements like financial independence, an earlier retirement, reduced anxiety and the self fulfillment of being able to provide financially for loved ones.
I meet with a lot of people who feel they are "all set" with their current financial advisor and investment plan since they are accustomed to doing what they've always been doing. Meanwhile, they are overpaying in fees and taxes, are not generating meaningful returns on the "conservative" part of their portfolio and have very little exposure to industries and themes that stand to potentially generate the highest investment returns over the long term.
These people may have to work longer, save and worry more while spending and giving less. In my mind, these investors should have higher expectations and pursue their dreams by going outside their comfort zone.
Talking to an experienced, tax aware fiduciary is a start. Feel free to reach out if you would like me to help evaluate your financial service providers and investment managers.