By Alexander Green In my last column, I discussed the many uncertainties facing investors today.
Just a few things that no one can predict with any certainty are economic growth, inflation, currency values, commodity prices, scientific discoveries, technological breakthroughs, bull and bear markets, election outcomes and future legislation.
That’s before we get to possible bolts out of the blue: a major terrorist attack, a hedge fund blowup, war in the Middle East, an epic natural disaster (think California quake, the big one), a crippling cyberattack, or something we haven’t even considered.
For all these reasons, it makes sense to take 10 proven steps to bulletproof your portfolio.
In my last column, I covered the basics: saving more, asset allocating properly, rebalancing annually, and avoiding the siren song of the economic forecasters and market timers.
Here are the final five steps that will wrap your nest egg in Kevlar…
6. Cut your investment costs.
In most walks of life, you get what you pay for. This is emphatically not the case when it comes to investment managers.
Every year, three out of four active fund managers fail to outperform their unmanaged benchmarks. Over periods of a decade or more, more than 95% of them fail.
Do you really want to pay hefty fees to someone with less than a 1-in-20 chance of delivering the goods?
Investment fees and returns are inversely correlated. The more your advisor makes, the less you do.
This is particularly true in the fixed income area. Ten-year Treasurys currently pay 2.3%, for example. If you plunk for a bond fund with a 1% expense ratio, the fund is taking 43% of your annual return.
The goal is for you to get rich, not your broker or advisor.
7. Minimize your tax liabilities.
During my time as a money manager, I was surprised how many people paid little or no attention to the tax consequences of their investment maneuvers.
Minimizing your annual tax bite is crucial to reaching your long-term financial goals. How do you do it?
Avoid actively managed mutual funds. Not only do the vast majority of them underperform their benchmarks – see No. 6 – but you’ll get hit with regular capital gains distributions, even in the down years.
Minimize turnover. Warren Buffett rightly notes that the capital gains tax is not a tax on capital gains. It’s a tax on transactions. So he makes as few as possible, insisting that his favorite holding period is “forever.”
Do your short-term trading in a qualified retirement account. This way your gains compound tax-deferred.
Also hold high-yield stocks, Treasury inflation-protected securities (TIPS), real estate investment trusts (REITs) and taxable bonds in your retirement account. Otherwise, you’ll owe taxes on the dividend and interest payments each year.
Outside your retirement account, hold winners for at least a year. This way you’ll qualify for more favorable long-term capital gains tax treatment.
At the end of each year, offset realized capital gains with realized losses. You can buy the losing security back after 30 days.
In your taxable accounts, favor individual stocks, equity index funds and municipal bonds. …read more
Source:: Investment You
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