Risk bothers almost everyone to some degree but to maximize your returns, you’ll have to incur some sort of investment risk. The key is to know how much risk YOU can tolerate and work from there. Even in a turbulent market, however, there may be ways for even the most risk-averse among us to increase our investment returns. If you want to increase your returns without increasing your risk, ask yourself these five questions:
1. Where do you stash your cash?
I’m always amazed at people who keep large amounts in non-interest bearing accounts. I was a bank teller when I was in college in the 80′s and would regularly deal with people who kept $50,000 to $100,000 in a checking account. A non-interest bearing checking account. It blew my mind!
If you have large amounts sitting in liquid accounts earning nothing in interest, there is no increase in risk to move those funds to interest bearing accounts like Ally Bank’s Raise Your Rate CD or even an ING Direct savings account.
If nothing else, move your money to a local credit union where you’ll earn better than average interest since credit unions function basically as a non-profit that returns any profits to its members.
2. Do you have high interest debt?
In yesterday’s article (Should You Invest While You’re In Debt?), I defined “high interest” as anything over 12 percent. If you have debt this high, it makes no sense to put money into a savings account earning 1 percent when you’re paying credit card interest of 18 percent.
Don’t neglect building and maintaining an emergency fund with six months of expenses, but do put off your investing activities until that high interest debt is paid off. Like one of the commenters, Don, said yesterday, “Getting a 12+% return in the market is not easy to do, but paying down your debt that charges you 12% guarantees you that return.”
Where else are you going to get a return like THAT? Read How To Earn 20 Percent On Your Money – Guaranteed
3. Are you controlling your investment expenses?
Expense control while investing is crucial. While some gurus pooh-pooh the whole idea, Alan Roth explained it perfectly in his book, How A Second Grader Beats Wall Street.
- You’re paying far more in fees than you realize.
- You cannot predict where the stock market will be in [insert ANY length of time here].
- Wall Street gurus don’t know either. They’re just really good at convincing others that they know what they’re talking about. Remember that most “experts” were advising us to buy Lehman Brothers and Wachovia (among others) just days before they collapsed.
- The fees and taxes we pay cause our real returns to shrink to a fraction of our perceived returns.
- Our biases (and our financial planner’s biases) can cause us to lose big money over the long run.
4. Are you putting your money where it makes sense?
Beware of the radio and television gurus who are big on telling you that they know what’s best and to only invest in [fill in the blank]. What is right for one person’s financial situation isn’t for another’s and there is NO way to tell based on a 30 second phone call. One size never fits all.
Remember: gurus aren’t rich because they saved money, or cut up their credit cards, or bought rental houses, or bought and sold discounted mortgages. They’re rich because they convinced regular people to send them money in the hopes of realizing a dream. Get a good expert’s opinion … one that actually is certified to give it.
5. Are you utilizing ALL legal tax advantages?
I was told by a wise man once: “Son, it isn’t what you sell, it’s what you keep.” If you’re not utilizing every single tax advantage to your favor, you’ll be keeping a lot less. Consider moving your taxable money into tax deferred bonds or tax free accounts like a Roth IRA. Additionally, make certain you only invest in tax efficient accounts that are passively managed. Actively managed accounts buy and sell (churn) their stocks far too often. This churning generated taxes that lower your overall return.
With just some small tweaks, you can potentially increase the return you’re currently getting on your money without incurring more risk. And increasing returns without increasing risk is the pinnacle of investing!