Have you ever asked how to manage your investments yourself?  Look no further.  You are about to learn how to manage your investments with eight important steps to build wealth and reach your goals. Remember, it’s not just about learning these techniques, but using them effectively.  All the knowledge in the world is useless without implementation!

1. Know your fund fees

You know how much you pay when you go to a restaurant, the doctor, or the movies.  But do you know how much you are paying your investment fund?  For most people the answer is “No”, but it should absolutely be “Yes!”

There is a vast menu of investment funds from which to choose, and once you know what types of funds you want to own it’s time to look at fees.  Exchange Traded Funds (“ETFs”) are generally the least expensive fund type.  They are traded on public exchanges just like stocks, and they have their fees bundled into one easy-to-understand figure: the expense ratio.  The expense ratio is the percentage of your money that you will pay each year as an owner of the ETF.

Many funds will have nearly identical investment goals, but drastically different expense ratios.  So, if you have 5 different S&P 500 Index funds on your investment menu, look for the one with the lowest expense ratio.  You wouldn’t pay $10 for an apple when you could get an identical one for $0.99, right?

2. Diversify, diversify, diversify

There’s an old saying that just about everyone knows: “Don’t put all of your eggs in one basket.”  The same goes for investing, except one could more appropriately say “Don’t put all of your nest egg in one asset.”

Sometimes stocks outperform bonds, sometimes bonds outperform stocks, sometimes emerging markets beat domestic ones, and sometimes cash is king.  The point is, it’s impossible to know what the best asset class will be for the next month, year, or decade.  Investing across different types of assets will smooth out your results because it is highly unlikely that every asset will lose money all at the same time.

So, if all of your money is invested in Google, you may want to diversify sooner rather than later.  To be honest, if the market is still open for trading right now, go diversify today!

3. Maximize your tax-deferred or tax-free accounts

Newsflash: The government wants you to save money!  That’s why they’ve put together programs like IRAs and 401(k)s.  Maximizing your IRA contributions every year is an important step for creating wealth faster.  Below are descriptions of the 2 most basic types of retirement savings plans.

Traditional IRA:

This type of IRA allows you to invest your money without paying income tax on the earnings until you withdraw it.  Anyone can receive a tax deduction by contributing up to $6,500 (or $7,500 if age 50 and older) to a traditional IRA as long as they follow these guidelines:

• If single, have a modified Adjusted Gross Income (“AGI”) of less than $73,000 (partial deduction available if under $83,000)
• If married (and filing jointly), have a modified AGI of less than $116,000 (partial deduction available if under $136,000)

There is also some relief for high-income earners.  If you make greater than $83,000 (or $136,000 if married) AND you are not covered by an employer-sponsored retirement plan, you can still get a tax deduction for IRA contributions.

Even better: If you are a high-income earner AND you are covered by an employer-sponsored plan you can still make your contributions.  You cannot take a tax deduction for it, but you can still invest it without paying income tax on the earnings until you withdraw it.

Roth IRA:

This type of IRA allows you to invest your money without paying income on the earnings…ever!  Unlike the Traditional IRA, you do not get a current year tax deduction.  The contribution limits are the same as the Traditional IRA, but with some tweaks on eligibility:

• If single, have a modified AGI of less than $138,000 (partial contribution available if under $153,000)
• If married (and filing jointly) have a modified AGI of less than $218,000 (partial contribution available if under $228,000)

Unlike the Traditional IRA, once you exceed the income limit you cannot make a direct contribution under any circumstance.  You can do a Backdoor Roth IRA contribution, but you should talk with your financial planner before committing to that strategy; there can be unforeseen tax consequences.

There are other varieties of retirement accounts with similar benefits and restrictions (e.g., 401(k), SEP-IRA, 403(b), Simple IRA).  Make sure that you are maximizing the benefit out of all of these programs that you possibly can!  You will thank yourself later!

4. Use asset location to your advantage

Asset allocation is often confused with asset location.  The two sound similar, but are completely different.  Asset allocation is your division of investments (see number 2), whereas asset location is the strategic placement of your assets based upon the taxation of the asset and its account.

For instance, if you have a Roth IRA, Traditional IRA, and taxable brokerage account you want to divide the assets strategically, not equally.  Further, let’s assume that you have a growth fund (a stock fund that pays no dividend), a corporate bond fund, and a municipal bond fund.  You will want to locate your growth fund in the Roth IRA because it has the best long-term potential for growth and will never be taxed in the Roth IRA; you will want to locate your corporate bond fund in your Traditional IRA because the income stream won’t be taxed until you withdraw the money, and; you will want to locate the municipal bond fund in your taxable brokerage account because municipal bonds aren’t taxed federally, so there is no benefit to putting them in a tax-sheltered environment.

Being strategic is important.  Simply dividing the assets equally between the three accounts would cost you dearly in the long run.

5. ACH your savings automatically

This one is incredibly simple.  Many people have trouble saving because they have to actively do it.  If you turn saving into a passive activity it becomes much easier to accomplish.  Set up an ACH transfer from your bank account to your investment account on a regular basis.  Once you’ve set it up it will automatically happen at regular intervals and you won’t have to think about it again.  You may even forget that you had that little extra money at all!

Bonus: if you can automate that ACH transfer to invest into your funds of choice without lifting a finger you will reap the benefits even more!

6. Don’t try to time the market

It doesn’t matter what anyone tells you; there is virtually no one that can time the market consistently.  This applies to a senior analyst on Wall Street all the way down to a retiree managing his or her IRA.

You have probably talked to someone who called the bottom during COVID or who exited the market just before the downswing in 2022, and it’s possible (although unlikely) that it’s true.  People tend to tout their successes and mask their failures.  You will seldom hear someone admit that they bought at the top or sold out at the bottom.

It’s okay that you can’t time the market perfectly.  Just knowing that will make you better off than most others.  Instead of timing the market, simply invest periodically according to your asset allocation.  Sometimes will you buy at a temporary high and other times you will get rock-bottom prices, but overall your results will be smoother and your psyche will thank you for it.

7. Harvest your tax losses

Harvesting your losses is an important, yet underutilized technique in improving your investment returns.  Harvesting losses is simple in theory: sell investments that have unrealized losses to offset your realized gains.  It gets a little bit trickier when you consider that you must reinvest the proceeds from the sale or keep it in cash.  If you decide to reinvest the proceeds you must be sure that the new investment is not “substantially identical” to the one you just sold.  A stock fund and a bond fund are certainly different, but two different technology funds with 95% similar holdings could be interpreted as substantially identical, and thus negate your tax loss harvest.  After 30 days though, you are allowed to reinvest in the exact same investment and retain your tax loss harvest.

As you approach the end of the tax year it’s always good to plan ahead and see if you can eke out a little extra investment return by reducing your taxes.

Remember: Your capital losses cannot exceed your capital gains by more than $3,000, else the excess is carried forward to the following year.

8. Rebalance periodically

So, you’ve done all your homework and found several different funds in which to invest.  You place all of the orders in your brokerage account and you’re off to the races.  Except a day later, the asset allocation you’ve so carefully crafted is no longer in perfect balance.  As days turn to months and to years, your allocation has become skewed and you are now over-invested in the outperforming funds and under-invested in the under-performing funds.  What are you to do?  Answer: Rebalance.

When you rebalance you are “resetting” your portfolio to your desired allocation by selling your outperformers and buying your underperformers.  Not only are you getting back in line with your predetermined allocation, but you are giving your portfolio a little boost.  This little boost comes from the tendency for outperformers in one period to become underperformers in a future period.  This reversion from outperformance to underperformance is not foolproof, but will serve you well in the long run.

There is software that will help you to automatically rebalance based upon your criteria.  If you are a whiz on Excel you can do it yourself.

There you have it!  Eight excellent strategies to implement to better your future.  Go out there and make it happen!

Sherman Asset Management does not provide tax or legal advice.  The information contained herein is provided for informational purposes only.  Do not rely solely upon this information to make tax decisions.  All figures provided in this post relate to tax year 2023.