Friday, February 8, 2013

Keep Taxes Low to Maximize Returns - Here's How

Portfolio research has examined the long-term impact of expenses and taxes on investment returns and concluded that, while asset allocation remains the most important factor affecting variability of returns, keeping costs and taxes low is an important factor for investors who are trying to maximize return.
Because mutual funds may distribute capital gains throughout the year, mutual fund investors are often concerned about losing investment returns to taxes. But individual stock and bond investors are vulnerable to taxes as well, depending on how they manage their investments.
Return lost to taxes sucks, but the good news is you can exercise a good deal of control here. Think about this: diversification and asset allocation are great tools for helping to reduce portfolio volatility and variability, but we're still going to be subjected to the short-term moves of the market, no matter how diligent we might be in setting up our portfolio and selecting our investments. Where we have the greatest degree of control is the area of expenses and tax-efficient implementation. Doesn't it make sense that where we can exercise the most control, we should?
Below is a table that displays where investors who want to minimize taxes may want to place their investments.

Taxable accounts
Tax-deferred accounts such as traditional IRAs, 401(k)s and deferred annuities
Here, you'd ideally place...
Here, you'd ideally place...
Individual stocks you plan to hold more than one year
Individual stocks you plan to hold one year or less
Tax-managed stock funds, index funds, exchange-traded funds (ETFs), low-turnover stock funds
Actively managed funds that may generate significant short-term capital gains
Stocks or mutual funds that pay qualified dividends
Taxable bond funds, zero-coupon bonds, inflation-protected bonds or high-yield bond funds
Municipal bonds, I Bonds (savings bonds)
Real estate investment trusts (REITs)
Private equity, partnerships (IRA only)

Also to keep fees as low as possible research index funds and index ETF's and use fee only advisors!

CBlakely CFP®, CTFA                      02/2013
Source: Schwab Insights

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