7 Items that Generate Investment Returns

Excessive fee-taking. Commission based products. Annuities. Individual stock picking. High expense mutual funds. For decades these products and practices have been useful in lining a broker’s pockets, but are often suboptimal for the individual investor.

At One Day In July, I’m focused on transforming new clients’ portfolios by moving them out of high-fee financial products and into a variety of low-cost index funds. I then invite clients to turn off the news, ignore the pundits and prediction makers, and focus on what matters: what is within their control in investing. Focusing on the fundamentals and tuning out the noise can help you become a more successful investor.

Below are seven items that are controllable and where my focus lies as a financial advisor:

1. Investment Expenses

This primarily includes the expense ratios of your mutual funds or exchange-traded funds, the costs of commission-based products, tax implications, and the fees you pay your financial advisor. Looking around the industry, I’ve found it’s not uncommon to see investment related expenses add up to 2-3% of assets per year. This is far too high, and an enormous cost that compounds over time.

2. Allocating Assets & Diversification

Index funds are considered a “passive” investment, but in my view there is no such thing as passive investing. Every decision an investor makes is active, even if a particular decision is to “stay the course” or invest all of your money into one fund. I show clients the benefits of allocating their assets into a variety of diversified, low-cost index funds. Every investment position should serve a unique purpose, and that purpose should not be to benefit your broker.

3. Rebalancing

Rebalancing promotes “buying low” and “selling high” in relatively small increments over long periods of time. This procedure helps keep portfolio risk in-check, and can boost investment performance over time.

4. Risk Management

Age is an important factor in setting the risk level of a portfolio, but it’s certainly not the only consideration. The time to consider portfolio risk is before major equity market downturns, not during them.

5. Savings Rate

The inconvenient truth is that nothing matters more to long-term investment success than your savings rate. There can be no investment without savings! I promote putting your savings on auto-pilot and establishing recurring contributions into a variety of investment accounts.

6. Tax Efficiency of the Portfolio

It’s important to place investments in the most tax efficient accounts. Index fund dividends, foreign tax credits, and tax harvesting opportunities are important considerations often overlooked by investors.

7. Avoiding Behavioral Errors

“Behavioral errors” in investing refer to market timing mistakes or shifting allocations at inopportune times. As the Dalbar¹ study routinely points out, behavioral errors are the single biggest risk an investor faces and can be detrimental to long-term portfolio performance.

These are the things we focus on at One Day In July. Everything else is predominantly noise that, if we react to it, can adversely impact your investment returns.

1. Source: 2018 Dalbar study