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.
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:
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 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.