4 Strategies to Build Wealth
Everyone wants their retirement savings to grow. But how can we do it? Well, unfortunately the truth is that there is no iron-clad, sure fire way to grow money. Investment in just about everything involves risk. However, there are time-tested methods that can potentially increase your chances to build wealth, and I wanted to take a minute to share four of them with you.
Increase your allocation to stocks
Since 2003, stocks have outperformed bonds. Asset allocation is a very important decision.
In simple terms, asset allocation involves deciding how much money to put into different types of assets. Obviously, performance over the last 20 years confirms what we have seen historically…stocks tend to outperform bonds over long periods. What’s the catch? Stocks are more volatile, meaning the price goes up and down more. This means that in order to pursue the better returns, you have to stomach a bumpier ride. However, if you can develop the emotional discipline to stay the course, stocks can be an excellent way to build wealth.
2. Increase your allocation to small caps
Going back to 2000, small caps have outperformed large caps, though will more volatility.
Most investors focus on large capitalization, or large cap stocks. While these can be great investments, historically, small cap stocks have outperformed their large cap counterparts. A small cap stock is a stock of a company with a total value of somewhere between $300 million, and $2 billion, depending on whose definition you use. By comparison, the largest companies in the United States have market caps well above $1 trillion. Historical returns confirm what we show here. What’s the catch? Small cap stocks are even more volatile than large cap stocks. The swings in price can be bigger. But yet again, if we are focused on the long term, and as a part of a diversified portfolio, small caps give us the opportunity to capitalize on the often rapid rise of smaller, lesser-known companies.
3. Manage your taxes
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
This table shows the impact of taxes on your total account value. You should always seek to understand what YOUR best strategy is for saving, and what types of accounts YOU should be saving in. This will be based on your personal tax situation, but this table illustrates the importance of working with the right professionals to make sure you are doing things in a tax efficient manner, to protect your money from the erosion of taxation.
4. Pay attention to costs
Make sure to ask not only about the advisory fees, but any other costs such as internal expenses. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
During my first interview with new clients, one of the most common things I see is that people don’t know what questions to ask, or how much they should be paying for financial advice. It really boils down to two things, in my opinion: What is the ALL IN cost that you will experience as an investor, and what services will the adviser be providing for any fees that they are charging you?
Many people think my job is just to buy and sell stocks all day. This process of managing investment portfolios, which is called investment management, is only one part of the job. A good financial planner should be helping with other areas such as creating a budget, paying off debt, planning for major purchases, saving money on taxes, and planning your estate so your assets are distributed according to your wishes.
As a consumer, you have a right to know what that difference in cost is, in plain English, and the right to decide if you are getting enough service to justify the cost. If your adviser cannot clearly articulate both, it might be time to look elsewhere for advice.
Armahn
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results. All indicies are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.