Consider the following six techniques to improve your investment returns. Implementing just a couple of these initiatives could lead to higher returns.
1. Refocus your goals.
Let’s face it, you know you could do a better job of funneling money into your investment accounts. The more money you put into your investments, the higher the return down the road. The reason you are not doing as well as you could is likely because of all the competing priorities in your life. The background noise in our lives can easily become deafening and destroy the enjoyable future we envision for ourselves. A great method to refocus your efforts back on your goals and get on track is to review your goals and priorities.
Ask yourself these four questions:
Have I changed my mind about what I am trying to achieve?
Am I making progress toward my goals?
What is interfering with my forward progress?
Am I doing what I need to care for myself, my family, and those who financially depend on me?* *If you have a significant other, be sure to work together on your family’s goals and priorities.
2. Incrementally increase your investment contributions.
I began my investing journey when I landed my first “adult” job. Since I was paid every two weeks, I invested $25 a paycheck, or $50 a month. But by the time I left that job, my wife and I were investing half of our net pay. We achieved that level by increasing our withholdings annually (at least), typically at pay-raise time.
Incrementally and consistently increasing your investment contributions turbo charges your use of dollar-cost averaging. Dollar-cost averaging involves automatically purchasing an investment with your retirement withholdings, and it’s a powerful way to increase your returns. Dollar-cost averaging means that you buy less of an investment when the price is higher, but you purchase more shares when the price is lower. The practice creates an overall investment cost–lowering technique that can increase your returns.
3. Control your emotions.
Humans are very emotional creatures, even if we believe we are not. Scientists now know through numerous studies that we usually use our emotions to make decisions but then mentally justify such behavior by making up logical reasons for our choices. The only thing more emotional than money is, of course, love!
A few common emotions interfere with our investing and goals of accruing long-lasting prosperity. The first is YOLO (you only live once). You might also believe that you work hard and deserve a reward right now. These two common thinking traps could prevent you from obtaining long-lasting prosperity. For example, if you take all your “rewards” now, you will never obtain the next-level, amazing experiences that would be available to you in the future, like traveling around the world, going on a safari, going to the Super Bowl, or best of all, not having to work anymore.
Another common emotional barrier is being frightened of the extreme volatility in the stock market. Volatility and recession predictions frighten people. However, volatility need not concern long-term investors (who have always profited). Relax and turn off the news! The financial markets are supposed to be volatile.
Speaking of turning off the news, many young people now believe the world will end soon due to climate change or nuclear war or that our culture will just simply collapse. “Doom spending” has become a popular way for young people to cope with the stress of believing our world is in grave danger. We are likely not on the razor’s edge of destruction. People have believed our world is headed toward abrupt destruction since the beginning of recorded history. For instance, the Doomsday Clock has been ticking along since 1947. But whatever we may face in the future, you will be in a better position to deal with it if you are financially prosperous.
4. Fund a Roth IRA.
Named after U.S. Sen. William Roth, who sought to increase our access to IRAs, Roths are a super-flexible way to invest your money. You contribute dollars you have already paid taxes on (net pay from your paycheck) into a Roth account you set up at a brokerage firm (such as Fidelity, Charles Schwab, or Vanguard). All the profits and the principal can be withdrawn tax free once you reach the age of 59-1/2. Additionally, you can control all investments in your Roth to maximize its effectiveness.
Roths can be used to pay for college for a spouse, child, or even yourself. And you can withdraw the amount you put into the Roth account (not the profits) any time without penalty.
5. Create a riskier investment portfolio.
Numerous studies have shown that the only way to beat market averages (index returns) is to take more risk. However, using anything other than index funds will cost you more in investment fees and eat up any gains you might make. The solution is to change your mix of stocks vs bonds. For example, if you have 60% in stocks and 40% in bonds (a 60/40 mix), you could change it to 70/30, 80/20, or even 90/10. Just be prepared for higher volatility.
6. Combine or roll over old 401K accounts.
Because of the matching funds they provide, an employer’s 401K is typically a good deal when you are working at the company. Once you leave that job, however, the advantage of having your account under your old employer’s financial management firm usually evaporates. Roll over (move) your money to your personal brokerage firm where you have total control over the fees and many more investment options.
Refocusing on your goals and improving your investing efforts are very powerful ways to ramp up future investment returns and create the life of your dreams. For other suggestions and more in-depth information, read The Illustrated Guide to Financial Independence or The Illustrated Guide to Financial Independence: Young Adult Edition.
—Larry & Lisa Faulkner
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