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4 WAYS TO IMPROVE YOUR RATE OF RETURN WITHOUT BUYING OR SELLING AN INVESTMENT

Let’s face it, 2008 most likely was the worst year you have ever experienced from an investment standpoint. In fact, it should be the most painful lesson you will ever learn. But time has proven that most investors do not learn. They inherently fall victim to the same mistakes time and time again. The mistakes range in severity, but nonetheless they are common. Some examples include:

  1. Buying the latest and greatest investment at the worst time. (I.E. Internet stocks in 1999-2000, Google at $700, Sirus at any price, Real Estate investments in 2005-2006.)
  2. Thinking you can do better than your advisor simply because you’ve read everything there is to read on Yahoo/Finance or “the message boards”, and you understand all there is to know about all “my stocks”.
  3. Changing to a new advisor because “he exposed the mistakes being made by your current advisor and promised you he would take ‘care of you.’”
  4. Buying that “investment thing” you heard about at that “dinner/seminar” which promised 13% a year and was guaranteed not to lose principal.

Buying great investments is difficult enough. But managing one’s finances is probably where you can have the largest impact on your overall rate of return, and it has nothing to do with the performance of the individual investment in a given year. What does that mean?

The external factors that effect a portfolio can reduce or increase an annual portfolio return from as little as 0.25% to as much as 40+% a year. That means that $10,000 profit you made on that “great investment last year” could end up being $9,975 for yourself or less than $6,000 after you cash out. Where do you start?

There are far too many concerns to discuss here but 4 of the most important areas you need to understand begin with:

  1. .
      What are my fees?
    • How does my advisor get paid? How much does it cost me? What are the industry averages and is it worth it?
    2. Where does it fit in my overall Financial Plan?
    • Is it meant to help pay for my retirement, a new home, the kid’s college, my vacation next year?
    3. Is it worth the risk for the expected rate of return?
    • Do I really need to earn 13% or is 4% over the next 5 years enough?
    • Do I even know the “true” expected rate of return?
    • What are the true risks?
    4. What are the Tax Consequences?
    • Is it taxed as ordinary income? (up to 40%+)
    • Is it taxed as Capital Gains? (Currently 15%)
    • Is it taxed at all?
  • What does tax deferred mean and ultimately what will the tax be?

The bottom line in all this is that maintaining a current Financial Plan with these 4 factors included among many, many more concerns will effect your annual return as much, if not more, than rather you buy Google when it “bottoms.” I strongly encourage you to meet with a Certified Financial Planner (CFP) and address these issues. If your advisor is a CFP and has created a Financial Plan for you, I suggest you ask him or her to explain how these issues effect your plan.