Though increasing our savings rate is the most effective way to increase our chances of a secure retirement, wouldn't it be nice if we could increase our investment returns too? Sometimes you can get a higher return by making only a few small changes. Here are a few adjustments that could increase your investment returns without significantly affecting the underlying investments.
Buy a little more when the market is down. I'm not talking about moving in and out of the market, because most people fail to time it right. What I'm saying is that when the market takes a dive, you should add more money into your investments than you normally would.
For example, let's say that your plan is to contribute $500 to your investment account each month. If the market takes a dive, do everything you can to spend a bit less. Make coffee one more day a week, drink less milk, eat out less, or make an effort to clip more coupons. It doesn't matter what it is, but do something to reduce your expenses temporarily so you can invest slightly more money. Instead of $500, invest $550 or $600. You won't suddenly outperform the market. But if you put in more when the market is down, you will reap more of a reward when it ultimately goes back up, which will boost your effective returns. When the market recovers, you could even take that $50 out again, but it's obviously best to leave it in there for the long haul.
Reduce your trading fees as much as possible. The commission on purchasing equities is getting cheaper and cheaper, so there is no reason you should be paying more than $5 to make a trade. If you have more than $25,000 in assets, some banks even offer free trading. If you have $500 to invest, eliminating a $10 trading cost is like automatically getting a 2 percent return for free.
Periodically make sure you are reinvesting your dividends on all your investments. Some brokers don't offer automatic dividend reinvestment plans on dividend stocks. But assuming yours does, you need to make sure to check the box beside “reinvest all dividend distributions”. This way, you don't have free cash lying around in your account earning next to no interest, and every dividend is reinvested with no commissions.
Search around for the cheapest fund. Sometimes a new fund with a similar objective is formed, or a fund you already own could change its expense ratio. You should periodically review your funds to see if there are any cheaper alternatives that meet your objectives. However, make sure that the new alternative truly meets your objective before you commit your capital. Even funds with similar names can have significantly different underlying investments. Also, you will have to worry about capital gains when you sell, so it is important to make sure the move will justify the cost.
Always keep asset location in mind. Many people have more stock holdings in their retirement accounts than their taxable accounts because they have the longest time horizon in mind for the retirement account money. But by holding stocks in your retirement accounts you could be paying more tax than you need to.
Some investments, like bonds, are better placed in a retirement account because they are taxed at a higher rate than dividends and long term gains on stocks. You should use your retirement accounts to store bond investments and anything else that will be taxed at a high rate because you can delay paying taxes on any gains held within retirement accounts. By considering the tax treatment of various asset classes you can save on taxes and effectively boost your investment returns.
David Ning runs MoneyNing, a personal finance site aimed at helping others change their habits for a better financial future. He suggests that everyone to sign up for an online savings account to get more out of our hard earned money.