Are you getting the most from your investment portfolio? Many investors have big goals for returns, but could still be taking a few simple steps to optimize their performance—and, as a result, boost the amount they're able to take home at the end of the day. Here's how to properly plan out your investment strategies to help maximize your investment return.
The First Steps Toward Creating a Solid Portfolio
When you're just getting started, the best moves to make with your money may not be clear, and that uncertainty can lead to hesitation and inaction. Finding and talking with a reputable financial advisor is always a safe and sound first step. Use the following tips as preliminary info for the conversation.
Assuming you're already investing through your 401(k) or other retirement plan, you might want to start exploring a brokerage account and setting up a portfolio. A brokerage account allows you to invest in whatever you want, making it a bit trickier than investing through a 401(k), where you're limited to the funds provided by your employer.
Start by choosing an asset allocation based on your age, and your risk tolerance: A good rule of thumb to start with: Subtract your age from 125. That's how much of your portfolio to allocate toward equities. If you're 35, subtract 35 from 125 and you get 90. So, your asset allocation could be 90 percent equities (like stocks) and 10 percent bonds. But, if you're 55, you might set up a 70/30 portfolio to reduce volatility and risk because you're closer to the point where you want to start drawing down from your nest egg.
How to Optimize Your Wealth Management Strategy
Once you set up your portfolio, you'll need to periodically optimize and fine tune your strategy. Your peak investment years are in your 30s and 40s when you're earning good income, have enough time before retirement to take on more risk, and still have decades of compound returns ahead of you.
Maximize your contributions. Assuming you've already put away an emergency cash fund of 9 months of living costs into a bonus rate savings account, you'll want to try to build toward investing about 20 percent of your income, or more if you can. First, try to max out your 401(k) and/or IRA contribution, then fund your brokerage account. And consider investing 30 percent or even more if you want to fast-track your way to financial independence. The more you contribute and the earlier you start, the more you leverage the magic of compounding.
Stay diversified. Diversification means keeping your eggs in a lot of different baskets, rather than just one. Invest in asset classes that are not closely correlated so that, if one part of the market declines, it won't drag your whole portfolio down.
Rebalance your portfolio. Remember that asset allocation we set up above? Unless you periodically rebalance, your portfolio will shift away from that allocation as the market moves up or down. Some positions will lose value; others will gain. You may end up with 70 percent stocks and 30 percent bonds when you wanted to be at 80/20. To rebalance in this case, you would buy more stocks and sell some bonds to get back to the right allocation. You can rebalance as often as every quarter, although rebalancing semi-annually or even once per year is sufficient for most investors.
How to Structure Your Investments for Maximum Tax Efficiency
You might think you're getting a great rate of return on your investments, but your true rate of return requires you to factor in the taxes. Follow these strategies to make your tax burden as small as possible, so you can keep more of your hard-earned gains:
Plan out your asset location. So you've planned out your asset allocation, with an eye toward diversification and risk balance. Now you need to think about your asset location, which is about choosing which investment accounts in which to place your assets to minimize your tax burden while maximizing growth potential. Strategically place your investments in a mix of tax-deferred and taxable investment accounts, based on how those investments are taxed.
Why? Not all investments are taxed equally. While there are many factors that need to be considered to optimize your asset location, including financial profile, tax laws, holding periods, and the tax characteristics of the underlying investments, there are some general concepts that can guide you.
Use taxable accounts for tax-friendly investments like, index funds, exchange-traded funds, tax-free or tax-deferred bonds, and also for riskier investments, because you'll be able to defer taxes and capture tax losses (more on that in the next section).
Use tax-deferred accounts for investments that are taxed at a higher rate like, taxable bonds, real estate investment trusts and mutual funds that generate high annual capital gains distributions.
Use tax loss harvesting to minimize the capital gains taxes you need to pay. The Federal government taxes any capital gains you make from investments, generally at a higher rate for short-term capital gains compared with long-term ones. One way to lower your tax rate is to sell off securities in your portfolio that have experienced a loss, thereby offsetting your overall short-term gains liability. You can then use the money from that sale to buy another similar security in order to maintain the balance and composition of your portfolio. This strategy is typically employed near the end of the year, as investors review their overall investment gains and losses.
IMPORTANT:To truly optimize your strategy, it's best to coordinate with a tax professional and a financial advisor who can help you strike a balance between investing for optimal return and reducing your tax burden.
Tailor Your Strategy to Your Needs and Goals
Ultimately, the right asset management strategy for you comes down to the specifics of your situation. No two investors are exactly alike, because we all have different needs, challenges and goals.
While investing guidelines provide you with a ballpark to start playing in, optimizing your investment strategy requires far more work, energy and expertise than what simple rules of thumb can offer you. If you're interested in elevating your investment performance, talk to a qualified, trained and experienced financial advisor for objective advice and guidance to take you from where you and your portfolio are today, to where you want to be with your wealth tomorrow.
The information contained herein is for information purposes only, is not designed to address your financial situation or particular needs and does not constitute the rendering of tax or legal advice. Investment and Insurance products are offered and sold by Bankoh Investment Services, Inc., a nonbank subsidiary of Bank of Hawaii and a member of FINRA/SIPC. Investment and insurance products are NOT FDIC INSURED, NOT BANK GUARANTEED, NOT A DEPOSIT AND MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL. Asset allocation and diversification do not assure a profit or protect against loss. Neither the information nor any opinions expressed herein should be construed as a solicitation or a recommendation by Bankoh Investment Services or its affiliates to buy or sell any securities, investments or insurance products.