3 Things Sapping Your Returns: Fees, Taxes, And Inflation

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3 Things Sapping Your Returns: Fees, Taxes, And Inflation



Uncategorised Author: Admin

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Most of us want the best possible returns on our investments. However, even as you look for better returns, you might be overlooking some important items that could be reducing your real returns. As you plan your future, you need to do what you can to offset the effects of fees, taxes, and inflation on your portfolio. You can’t get rid of these costs entirely, but you can limit their impact.

Fees

When you make your return on investment calculations, you might not consider the effect of fees.

However, you shouldn’t underestimate the cost of fees over time. Some of the fees that might be weighing on your portfolio include:

  • Transaction fees: Each time you make a trade, whether you buy or sell, you pay a transaction fee. Frequent trading can lead to high transaction fees over time. Most investors do better if they carefully think through their transactions, and limit the number of transactions taking place.
  • Expense ratios: All funds come with expense ratios. Whether it’s an actively managed mutual fund, an index fund, or a low-cost ETF, there’s going to be an expense ratio. Each year, you pay fees based on the value of your shares. The more shares you have, and the higher the expense ratio, the more you pay. Choose funds with lower expense ratios.
  • Management fees: If you have someone else managing your money, you will likely pay management fees. This can also include the fees associated with the plan management of your employer’s retirement plan. Whenever possible, look for the best value, choosing to get the best possible management at the best possible price.
  • Other fees: Be on the lookout for other fees. With mutual funds, these fees might come in the form of a sales load. There are other fees, such as brokerage maintenance fees, that you might be charged as well. Pay attention, and look for ways to avoid as many fees as you can.

Taxes

You need to begin planning now to offset the cost of taxes. This can be a difficult task, but it’s important that you consider the effect of taxes on your investment returns. Tax-advantaged retirement accounts can help you delay paying taxes until you are in retirement (Traditional qualified retirement accounts), or they can provide you with a way to pay taxes now, and avoid paying later (Roth retirement accounts). But it’s not just your retirement fund that you need to worry about. You also need to consider the tax implications of long-term capital gains versus short-term capital gains. You can also consider how selling at a loss, and harvesting your losses for a tax deduction, fits in with your overall plan. You can’t avoid taxes completely, but you can create a strategy that can help you legally reduce your tax liability, increasing your real returns over time.

Inflation

Inflation is an almost silent creeper. Inflation erodes your real returns in a way that is almost unnoticeable. It is a reduction in your buying power; over time, inflation renders your money less valuable. When you consider inflation in your calculations, it quickly becomes apparent that you can’t be too risk-averse with your portfolio.


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