Looking for a few good ways to make your portfolio shine in 2017?
Yesterday, I shared with you three changes you should make to your brokerage account to prime it for maximum profits. That list included saying no to money market funds … reinvesting your dividends … and trading/investing in the account that gives you the best tax advantages.
Today I am sharing three more methods that I use. If you’re looking to boost your profitability this year and beyond, you should consider making these “switches” too …
Switch No. 4: Pay Attention to Charges, Fees & Expenses!
You need to be aware of “all” investment-related fees. “All” means look at two different sources of charges you may be incurring …
1) Direct charges from the brokerage firm you’re using (commissions, maintenance fees, other miscellaneous expenses)
2) Annual charges from “fund” holdings in your portfolio (mutual funds, closed-end funds, ETFs, etc.)
Let’s walk through how to locate and decipher each of these costs.
No. 1) Do you know what you’re paying on each buy and sell order? If you don’t, you should find out immediately. Your brokerage firm should have a commission schedule available on its website. If you can’t find it, give them a call.
Once you know what you’re paying in commissions when trading different types of securities, you may want to do some comparison-shopping.
NerdWallet is an excellent source for comparing online brokers. Click here to compare 60-plus online brokers. NerdWallet calculates every fee associated with online trading accounts (commissions, margin rates, paper statements, wire transfers, research, and more). The site will even factor in promotions that online brokers are running …
Transfer or open an account and you could receive your first 250 trades for free — or land a $500 cash bonus. These are worth looking into if you’re thinking about switching online brokers. They shouldn’t be the deciding factor, but a promotion could serve as a tiebreaker.
What kind of trades do you execute the most? This matters. Brokers charge different commissions by security type (bonds, stocks, mutual funds, etc.). For example, if you’re primarily an option trader, you may want to try Interactive Brokers, TradeStation or OptionsHouse.
What other fees are you paying? Are you still getting paper statements via snail mail? You might be paying a couple bucks per month for this service. Switch to e-delivery. Maybe you’re getting hit with a monthly or annual maintenance fee. There are online brokers who don’t charge either.
Maybe you’re the type of investor that wants extra hand-holding. If you are, that’s fine. You’re probably better off using a more-reputable and -established online broker. Firms like E*Trade, TDAmeritrade and Charles Schwab may serve you best — even if you’re paying tad higher commissions. For the record, out of these three, NerdWallet says you’ll pay the least per month using Schwab.
Are you content with your online broker? Service … “all-in” costs … website functionality … and other areas of interest.
If the answer is “no,” you should start hunting elsewhere. Use the NerdWallet link above to see what else is out there. And you can see how other firms stack up to your current firm.
No. 2) Do you own any mutual funds, closed-end funds, ETFs or ETNs?
First, hopefully, you’re not paying any “loads” or sales charges that go directly into your broker’s wallet. Stay away from “A,” “B,” and “C” shares. Buy “no-load” funds. Typically, “D,” “Investor” or “Institutional” shares. There are a lot more letters I’m not covering. If you’re a novice mutual fund buyer, be sure to find out if your share class comes with an additional charge.
Second, find the underlying expense ratio on all funds you own or will purchase in the future. An expense ratio is an annual charge a fund company charges their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses. (Management fees, administrative fees, operating costs, etc.)
Generally, don’t pay more than 1% in expenses for any mutual fund. And don’t want to pay more than 0.50% in expenses for any exchange-traded product (ETF or ETN). These are baselines. There are select managers worth paying up for, but you have to be willing to hold their funds through a full market cycle.
If you’re not sure how to find a fund’s expense ratio, here are a couple methods for you:
Go the fund family’s website and find it on the fund’s page, fact sheet or annual report.
Go to Morningstar.com. Plug the fund’s ticker in the quote box at the top of the page (see below for where to find it).
An expense ratio of 0.83% means for every $10,000 you invest, you’re paying $83 in expenses each year. Doesn’t sound like much. But it can add up over time. Plus, it becomes even more costly if your fund doesn’t outperform its benchmark (corresponding index) over time.
If you’re paying high fees, you have other options. You can buy stocks yourself or look for a lower-cost fund or ETF as a substitute.
For the rock-bottom fees, I’d stick with Vanguard for mutual funds. For ETFs, use iShares, State Street, Vanguard and Charles Schwab for the lowest costs and best reputations.
At the end of the day, all these fees (from online brokers and funds) add up. Each dollar you pay in charges, fees, or expenses, is $1 that’s not working for you to grow your account.
Often, these costs can be reduced or removed altogether, which is better for your bottom line.
Switch No. 5: Enable Options
If you already trade options, you can skip this one.
Options provide investors with additional tools for their toolbox, as opposed to stocks. Here are some of the advantageous strategies you can use with options:
Take a bullish or bearish outlook.
Profit if a stock/ETF stays within — or moves outside — a certain price range.
Profit if a stock/ETF increases or decreases in volatility.
Hedge, or protect, prices moves of existing positions.
Generate income if a stock stays above or below a designated price.
Many investors are scared of options. It’s hard to blame them. The most basic form of options trading, usually, ends up in 100% loss of capital. I’m taking about buying calls and puts. Most options investors gamble with this strategy because they’re trying to hit a home run (book huge returns) with as little capital as possible. Unfortunately, the majority of these trades go bust.
Here at Uncommon Wisdom Daily, we’ve dialed down the risk with these option trades. Our industry experts make calculated bets and bring you along for the ride.
What most investors don’t realize … is the other side of these trades. Selling covered calls and selling cash-secured puts. This can be far less risky than buying stocks individually.
It’s the insurance side of option trading.
In the stock market, selling a put is like placing a buy-limit order on a particular stock and getting paid income whether the stock hits your buy price or not. If the stock drops to your specified price, you’ll own it. But you’ll buy it at a discount PLUS you keep the income (premium) from the trade. If it never drops to your limit price, you still keep the income!
Here at Uncommon Wisdom Daily, we have services for this, too. In fact, Natural Resource Investor and Superstar Trader were two of our five most profitable services in 2016.
You can’t dabble in the options market without an approved options agreement and assigned options level. So, that’s where you need to start: Fill out an options agreement with your online broker. This doesn’t mean jump into options trading today or tomorrow. Rather, this is just the groundwork for when you’re ready to get started and comfortable with option trading, in general.
Your online broker will review your application and approve you for a certain option level. Levels vary by firm. You only need the first level of approval to have success with options — and our services. The other levels are for sophisticated options traders.
Switch No. 6: Diversification is Key
What’s the biggest driver of investment returns?
You might guess the individual securities you own in your portfolio. But that would be wrong.
It’s actually your asset allocation.
Asset allocation is deciding where and how to invest your money, and in what proportions over time.
Numerous investment studies have proved asset allocation is the most-powerful tool in all of investing. Like this one …
Asset Allocation Accounts for over 90% of Your Portfolio’s Performance
|Source: Brinson, Beebower, Financial Analysts Journal ‘86, ‘91, ‘94|
So what assets should I allocate my money to? And in what amounts?
Well, no one has the exact right answers to those questions.
One suggestion is to make sure your portfolio is diversified. Ideally, you should diversify your assets into as many asset classes as you can. This will protect your portfolio better from market gyrations than if all your money was in just one asset class.
Even the U.S. Securities and Exchange Commission (SEC) — whose goal is to protect investors and maintain fair, orderly and efficient markets — preaches asset allocation and diversification.
Here’s a tidbit from the SEC’s website:
Set Your Portfolio Up for a Smoother Ride
Here are some suggestions for doing that inside your accounts and overall portfolio …
First, make sure no individual position accounts for more than 10% of your overall portfolio. The only exception would be a broad-based index fund or ETF. Honestly, I’d strive for a 5% individual position maximum if you can.
Second, spread your money around non-correlated assets (assets that move in different directions from each other). Cash, bonds, large-cap stocks, small-cap stocks, sectors, foreign stocks, real estate, precious metals, etc.
By diversifying your assets into different areas of the market, you’ll control risk.
Third, stick to the plan longer term.
If you practice diversification in your portfolio, you’ll be a better investor.
Follow all six of my suggestions — saying no to money market funds … reinvesting your dividends … and trading/investing in the account that gives you the best tax advantages … paying attention to fund charges, fees & expenses … enabling options trading … and diversifying your assets — and you’ll be on the road to less volatility and higher returns as a long-term investor.