by Joseph Maas
It’s an easy trap. You see a good investment and do your research. The company has strong fundamentals, the performance history is solid, the leadership is spot-on…and the returns are good for this sector. You decide to invest. But did you carefully consider if the return is really as good as it seems.
Are You Really Earning What You Think?
To maximize investment growth over time, it’s critical to factor in the effects of fees, taxes, and inflation on your returns. Many posted returns explicitly exclude the effects of fees, which come right off the top of each year’s gains. It’s important to dig deeper and find out how much that performance is costing you each year so you can decide which investments will serve you best.
Taxes can also take a serious bite out of your gains each year so it’s important to structure your investments to account for taxes on capital gains, dividends, and income. Taxes should not be the primary driver of an investment strategy, but incorporating tax efficiency into your overall plan will help you keep more of what you earn. If taxes are a problem for you, structuring your investments so that taxable investments can grow in a tax-deferred account may be an option.
Inflation, which is the erosion of your purchasing power over time from increases in the cost of goods, is another insidious force that can eat away at growth each year.
An investment strategy that fails to account for the effects of fees, taxes and inflation on overall return will severely handicap your ability to increase your wealth over time because if you do not build these factors into your investment plan, you will lose your most valuable commodity…time.
After some research, you may find that an investment with a lower return may actually have a higher total return once you account for taxes, fees, and inflation. If you find this research complicated, you might save yourself time and aggravation by consulting with a financial professional.
When you seek financial advice, select and work with a Certified Financial Planner®. A Certified Financial Planner® has the training and experience to professionally guide your investment decisions. We recommend you hire a CFP® who is independent and not associated with any investment company so you receive only unbiased recommendations. Your CFP® should also be fee-based, not commission-based, so you know your financial advisor’s priority is solely your best interests.
To learn more about Joe Maas, view his Paladin Registry profile.
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