Many people are so busy chasing return in the market that they lose sight of the things they can actually control when it comes to their investments.
Here are a few tips you can use to enhance your performance that takes no guesswork whatsoever.
Understand your fees
First, it is very important to understand the fees you are paying. Many people fail to realize that the investment world works just like many other industries.
In many industries when you buy in bulk you get discounts and cheaper prices. The investment world operates the same way.
If one person has $10,000 to invest and another person has a $100,000 to invest, both may be entitled to break points or discounts for the fees and commissions associated to the investments they are in.
We can’t escape fees, but it is important to understand what fees you’re paying to make sure you are being treated fairly.
Too many times I run across people who have no idea what they are paying. By understanding this one concept, you could save as much as 1% or more.
One percent may not sound like a lot, but on $100,000 that’s $1,000 a year, and on $500,000 that is $5,000 a year or more saved just on fees. That money is much better off in your pocket!
This savings in the long run, especially when compounded, can result in tens of thousands of dollars.
How do you know if you are entitled to break points or discounts? You just simply must ask the institution you are working with. They are required to disclose this information to you.
Turnover ratio is another key thing to consider in your portfolio. This is the amount of buying and selling that is taking place within one year.
For example, let’s say there are 100 stocks in a fund that you own and the manager buys and sells 50 of those stocks within one year. That would be a 50% turnover ratio. If they should sell 70 stocks out of the 100 within one year, this would be a 70% turnover ratio.
If you have a high turnover ratio in your portfolio you could be paying higher fees and commissions which eats into your return. Ultimately, it is in your best interest to stay informed and make sure the turnover ratio in your portfolio is in your best interest and makes sense.
Taxes resulting from buying and selling
Another factor issue is the amount of buying and selling that is taking place within one year. If there is a lot going on, you may be getting hit with short-term capital gains as appose to long-term gains.
The taxes on short-term gains are much higher than on long-term gains. This again eats into your return. It is important to review this, but how do you know what the turnover is in your portfolio? Once again you must ask; it must be disclosed to you.
Choose the appropriate cost basis for your stock portfolio
Many funds will use a default method known as FIFO which stands for “first in, first out.” With the FIFO method, whenever you sell shares the first ones that came in are the first ones to go out. If you have a fund that performed well over the years, those first shares may be the cheapest shares and therefore causing you to have the highest capital gains.
Uncle Sam allows you to choose your cost basis. So if you want to use HIFO — which stands for “highest in first out” — you can use this method to save money in taxes.
There are other ways to calculate the cost basis on your portfolio. Depending upon what it is you are trying to accomplish regarding taxes, a cost base method may work best for one fund and an entirely different cost base method for another.
It’s always a good idea to consult with a seasoned investment adviser who can review your situation and pin point areas in which you can enhance what you are already doing.
Rick Rivera is a partner at Safeguard Investment Advisory Group and has more than two decades of experience in the financial industry providing guidance to those planning for retirement. He is an investment adviser representative holding a series 65 license, as well as Life-Only and Accident and Health licenses in California.
[The content provided through this article and www.nydailynews.com should be used for informational purposes only and is not intended to be a substitute for professional advice. Always seek the advice of a relevant professional with any questions about any financial decision you are seeking to make.]
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