Everyone wants their investments to grow faster, but the real question is how to do it.
There are legions of Wall Street professionals who struggle to beat the major indexes. So, how will the rest of us manage?
“It’s all about the things that you can control,” says Bob Stammers, director of investor engagement at the CFA Institute in New York. “A lot of people focus on the next new investing trend, or the next great fund.”
Of course, an investor can’t control the performance of funds or stocks any more than you can influence the market. So what should you do and not do?
The Do List
Do pick low-cost index funds. For most investors, index funds with low annual fees are a smart bet. Index funds never beat the index, but they won’t be far behind, and a part of that is that index fund fees are smaller.
[See: 10 Long-Term Investing Strategies That Work.]
In 2016 the average actively managed stock mutual fund had annual expenses of 0.82 percent, or $82 per $10,000 invested, according to data from the Investment Company Institute. That compares with just 0.09 percent for index equity funds in the same period.
Do minimize cash. Holding a substantial portion of your assets in cash is usually a mistake. Unlike stocks or even corporate bonds, the interest income from cash typically won’t keep up with inflation over the long haul. It certainly hasn’t performed as well as the broad stock market.
Do be disciplined. You need to stick to an investing discipline, says Stephen Wood, chief market strategist at Russell Investments in New York. What does that mean?
A typical portfolio strategy might be to invest 30 percent in bonds and the rest in U.S. and foreign stocks, with the caveat that the portfolio gets rebalanced to those proportions approximately once a year.
In practice, it means you’ll be selling some of the winners in your portfolio and buying some more of the losers. It sounds easy, but many people find it hard to invest more in something that has fallen in value.
But if you stick to this sort of discipline then it can “help minimize errors for investors,” Wood says. Such mistakes typically include selling assets when the prices fall, and buying when the rise. That would be the opposite of the investing maxim of buy low, sell high.
[See: The Fastest Ways to Lose Money in the Stock Market.]
The Don’t List
Don’t chase top performing funds. Those funds which perform better than the pack don’t stay out front for long. Even over a mere five years, less than 1 percent of actively managed funds stay the top of the pile, research shows.
In the 60 months through March 31, 2017, of 585 domestically-focused active stock funds, only 0.34 percent of them remained in the top quartile for the whole period, according to a recent analysis by S&P Dow Jones Indices.
Neither do many actively managed funds beat the broad market indexes. For example, 84.6 percent of funds focused on large capitalization stocks underperformed the Standard & Poor’s 500 index after fees in the 10 years ending Dec. 31, 2016.
“We are finding that even when you add the fees back, across almost all categories, active managers overwhelmingly underperform the benchmark,” says Aye Soe, managing director, global research and design at S&P Dow Jones Indices.
Don’t trade often. Trading your investments often is a sure way to lose money. First, it usually costs you to make a transaction when you sell or buy stocks or exchange-traded funds. If you sell something and then buy something else, then there are two fees.
Also, when you trade you need sell your first investment at the right time, and then you need to buy at the right time. Timing the market is really hard; the more you trade, the more likely you are to trip up.
Don’t forget the taxes. Taxes can take a big bite out of your returns, so you need to keep them in mind when you plan your investing strategy, Wood says. For instance, if you can invest through a 401(k) retirement plan or an IRA, then your income taxes are deferred until retirement.
Distributions from Roth IRAs are free of income tax, but the contributions are made after taxes are paid.
[See: 7 Reasons to Invest in an IRA.]
There are other tax considerations. For instance, if you never sell a stock there are no capital gains. You could conceivably just collect dividends for the rest of your life and never incur any tax due to the rise in the stock price. For instance, people who bought Apple (Nasdaq: AAPL) at a split-adjusted $1 a share more than a decade ago now receive more than twice that every year in dividends.
Even trying a few of these ideas could help boost your investment returns over time.
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3 Do’s, 3 Don’ts for Boosting Your Portfolio Returns originally appeared on usnews.com
