Some people can't sit in the living room without holding the TV remote. Others find it hard to be the passenger in a vehicle. Investing for some can be just as unnerving because they are releasing control of their money. It's important to realize you are not relieving all your influence over money when buying stocks, bonds, and other types of assets
As an advisor and investor, we can control three major factors:
1. Costs
2. Taxes
3. Asset Allocation
Costs are controlled by using low expense index funds and trading infrequently. Index funds are passively managed meaning the investments inside the fund stay the same over long periods of time. This keeps brokerage costs low and a fund manager does not have to be paid to actively maneuver your money. According to Lipper, the average cost of actively managed funds is 1.18%. Vanguard index funds average 0.16%. An added benefit to using index funds is that they perform better than about 70% to 80% of active managers in a given year.
Taxes can be minimized and or avoided by using different types of investments and accounts. Index funds, with their low turnover, give little to any capital gains distributions. Capital gains are only realized when an investment is sold, giving the owner the flexibility to decide when to pay taxes. Using IRAs, a 401k, and other tax sheltered accounts allows you to avoid paying taxes on income, dividends and capital gains.
Asset Allocation controls how much risk you are taking with your investments. By owning different investments such as stocks, bonds, and commodities allows an advisor and investor to limit potential losses. Allocating across sub categories controls risk and return to a higher degree. In fact, academic studies have shown asset allocation determines over 90% of a portfolios return.
While we can't control everything when it comes to investing, some areas can still be managed to your benefit.
