3 Ways to Accelerate Your Wealth
Did you know that most investors will spend more time digging out of a hole after a market sell off than they will making new highs?
I was recently asked by the media for some suggestions as to how investors can accelerate and grow their wealth. Perhaps the best answer particularly for Millenials, GenX and those closer to retirement is to not lose money in the first place! All you need to do is look at the chart below.
Will Rogers was famous for saying “I am not so much concerned with the return on capital as I am with the return of capital.”
Tip 1 – Focus on Risk Management
Investors spend most of their time digging out of the hole created when markets fall apart. If you invested in 2000, it would take another 8 years to just get back to even. If you invested in 2008, it took you 7 years to recover. Simple yet deceiving math will tell you, if you have lose 50% of your money, you now need to DOUBLE your money to just break even. This is exactly what we saw in 2008-09.
By limiting and focusing on the risk management, you can spend more time growing your money than digging out of the hole created by the markets. There are numerous ways to lower the risk such as making sure you are re-balancing quarterly, you are properly allocated to your risk tolerance, and setting stop losses on your investments.
Tip 2 – Diversify Your Investment Universe
If all you have is stocks and bonds…. you’re doing it wrong.
For a long time, when your only option to invest was with a broker, by merely owning bonds in conjunction to your stocks, you were well on your way to being diversified. Then you add in geographical diversification by adding international stocks and bonds and you can generate extra returns and perhaps lower your risk to a US recession.
Unfortunately that all flew out the window over the last 10 to 15 years with the advent of computerized trading and online brokerage accounts where any investor can liquidate all of their investments with a few clicks of a mouse, without ever talking it through with a professional. As we had seen in 2008, it almost did not matter what you were invested it… if it was liquid, it went down.
Why? Because most retail investors are not sophisticated and don’t bother looking at the underlying investments. They would think twice about selling their home for 50% less than what they paid for it… but did not bat an eye with investments because they simply did not understand them.
By opening up the ease with which you can buy or sell investments, the markets tend to overshoot on both the rallies and the sell offs. For professional investors it may create opportunities to step in after, however this is a very real problem for retail investors.
This is why large endowments focus so much time on alternative asset classes such as real estate and private equity, that have low or inverse correlations to the markets. Better yet, if the investment has NOTHING to do with the stock markets… even better. If you look at many endowments and institutions, it would not be unheard of to see more than 1/3 to 1/2 of the money allocated to private, non-traded investments.
Tip 3 – Stop Overpaying Taxes! Do Some Tax Planning!
A popular debate right now is passive low cost investments versus actively managed funds. Investors worry about that 1% instead of focusing on potentially wasting 30% percent or more in unnecessary taxes. By focusing on asset location, such as which investments belong in what types of accounts, you can minimize your tax bill.
An example of this would be to have tax free income investments such as Municipal Bonds in regular brokerage accounts along with long term, tax efficient investments such as ETFs, UITs (Unit Investment Trusts), stocks that you hold for the long term, along with fixed income that pays qualified dividends.
Your retirement accounts would hold inefficient investments such as actively managed mutual funds and traditional fixed income funds that would be subject to ordinary income taxes.
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