How to Invest - Incorporating Smart Financial Behaviors

In the first part of our How to Invest series, we talked about some of the basic principles behind building an investment portfolio. Now, we want to help you maintain your investment strategy with some simple principles that are proven to optimize performance. Financial mistakes are often driven by our own behaviors. When applying these 3 practices of regular rebalancing, tax mitigation, and cash flow automation you can implement processes to get the most from your investments and avoid some common mistakes.

Principle 1 - Smart Rebalancing

As an investor, your asset allocation should be the first level of matching your personal financial goals, risk tolerance, and time horizon with your investments. For example, you may have determined that an appropriate allocation for those variables means you invest 60% of your portfolio in stocks and 40% in bonds. But these two asset classes tend to move at different rates and even in opposition to each other. In a relatively short period of time, you can find your allocation out of line and be taking on more risk than intended. Regular rebalancing brings your portfolio back to alignment, while automatically taking gains in a higher asset class and buying another asset class at a potentially lower price. It works in various market conditions helping to reduce risk and improve return, but is often overlooked by many investors.

Principle 2 - Tax Mitigation

Taxes have a big impact on how much of the return you actually get to keep from your investments. Understanding the tax effect of your investments allows you to use different account types in a tax efficient manner known as “Asset Placement”. As an example, most investors do not know that mutual funds can pass gains and losses through to the investor. Because of this, some investors might want to consider putting mutual funds in retirement and tax deferred accounts for some investors. Even using different kinds of investments in tax sensitive situations is a smart idea; for example investing in municipal bonds in a non-retirement account can help produce federal tax free income. Finally, in your non-retirement accounts, understanding how to take capital gains or losses will help you harvest either to your benefit. We always recommend meeting with your CPA in making any tax related decisions, but applying the right tax mitigation tools for your situation can add an easy way to keep more of your return for yourself!

Principle 3 - Cash Flow Automation

This third suggested principle will help you stress less about your portfolio by applying a golden rule of investing. It automates the sensible logic of buying less of an investment when the price is expensive and more of it when it is on sale. The easiest way to set this up is by starting with having all of your investment distributions reinvested. It takes any dividends or interest paid out of the investment and buys additional shares automatically at the current market price. Another way to apply this is when you are building your wealth through regular contributions. If you make a fixed dollar purchase into your investments by periodic installments (the 15th of every month or every pay day as an example), you will buy less when the investment is trading higher and more when it is trading lower, ultimately helping you to accumulate more shares effectively. This is known as Dollar Cost Averaging (DCA).

Practical Investment Thinking - Avoiding High Fees

The above principles can work wonders on your bottom line results as an investor. But there is one more simple and sensible step you can take to improve your profits; avoid high investment fees. There are too many choices today to pay high commissions or heavy sales loads on your investments. There is no compelling evidence that supports the more you pay, the greater return you will get. In fact, the opposite is true! Fees can be a hindrance to your performance, so using low commission investment firms and no load mutual funds is a great way to improve your results just by avoiding unnecessary costs!

Investing takes just a little bit of time and attention to get started but with the extra effort you can put yourself on the right track for a successful financial future. If you have any struggles or simply find you just need a little help, reach out to us at team@ccminvestment.com for a free initial consultation!

This information is for educational purposes only and is not an offer to buy or sell, nor a solicitation of any offer to buy or sell the securities mentioned herein, or considered to be the rendering of personalized investment advice. Past performance is no guarantee of future results. Therefore, no reader should assume that future performance of any specific investment or strategy (including the investments and/or strategies discussed), will be profitable or equal to past performance levels. Conscious Capital Management, LLC assumes no responsibility for loss or damages resulting from the use of this information. A professional advisor should always be consulted before implementing any of the options presented.

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Conscious Capital Management is a registered investment adviser. We have a goal to provide Madison  Wisconsin's best Financial Advisors, Financial Planners and Socially Responsible Financial Advisors. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Past performance is not indicative of future results. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. This website is intended for Wisconsin residents only.

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