10 Feb 5 Simple Ways to Capture Extra Returns
If you are focused on using a smart portfolio approach as we discussed in a previous post, you can create additional returns to your portfolio while using a cost-effective and efficient management strategy.
Several studies, including one by Vanguard, have concluded investors can add anywhere from 2-4 percent in excess returns per year by following some straightforward steps that have nothing to do with beating an index.
Excess Returns Summarized
|Optimizing Strategic Asset Allocations (Better Risk/Return Profile)||
Up to 0.35%
|Utilizing Low Cost Investments||
Up to 0.45%
|Tax-Aware Loss Harvesting and Asset Location||
Up to 0.70%
|Regular Rebalancing to Targets||
Up to 0.35%
Up to 1.50%
|Total Potential Annual Value-Add||
2.0 – 4.0%
The values shown in the table assume an investor or advisor follows widely accepted best practices. The actual amount of additional value will be determined by skill, knowledge, and consistency. It’s also important to remember these benefits are earned over time, not necessarily every year. If you haven’t heard much about these value-added services, it’s because the financial services industry hasn’t figured out an easy and effective way to report them. You can learn more about the particulars of the Vanguard study here.
Governing Behavior Is Key
Getting even a portion of these excess returns might be simple, but it’s definitely not easy because emotions and a lack of time or knowledge may limit you.
Studies by Dalbar and Morningstar show that most individuals are terrible investors on their own. Not surprisingly, they tend to chase performance, are prone to short-term thinking, and make emotional decisions that negatively impact portfolio performance. In one of the studies, retail investors are losing anywhere from 2.5% to 5% per year from poor investment decision-making.
Advisors can add considerable value through behavioral coaching alone, but the human tendency for individual investors to overestimate one’s abilities in relation to others makes that a tough sell. After counseling clients through two bear markets in which stocks lost more than half their value, I can personally attest that behavioral coaching makes a big difference to long-term results and can greatly reduce unproductive investment noise.
It turns out, you don’t have to chase outperformance to capture excess returns after all. You can be smarter, and better off, by just following a proven and simple path.