3 Ways to Make Your Portfolio Shine in 2017

Looking for a few good ways to make your portfolio shine in 2017?

Today I’m sharing with you three changes you should make to your brokerage account for maximum profits. I use these three methods in my own brokerage account. And you should too.

Or at least as many as you can …

These simple adjustments will make sure your brokerage account is primed for maximum profits.

Switch No. 1: Say ‘No’ to Money-Market Funds

The first switch isn’t going to be a home run. It’s more like walking or bunting your way on to first base.

As I’m sure you’re aware, brokerage money-market funds are paying nothing. Bankrate.com reports the average money-market fund yields 0.02%. So, consider yourself lucky if you’re getting a yield higher than 0%.

And it’s not much better if you transfer your idle cash to a bank account. According to the Federal Deposit Insurance Company (FDIC), the average interest checking account yields 0.04% … the average savings account pays 0.06% … and the average money-market account has a rate of 0.08%.

It’s not worth moving your cash to a bank for these “peanut” rates.

But there are safe alternatives to both. And you can easily make this switch in any brokerage account.

If you don’t need the daily liquidity, buy one of these cash-alternative ETFs with your longer-term cash.

Neither of these ETFs are a good parking spot for a couple days or weeks. Only buy these ETFs if you’re willing to hold them for three months or longer.

The first option is the PIMCO Enhanced Short Maturity Active ETF (MINT).

MINT attempts to reach just beyond the shopping grounds of money-market funds. (Must maintain a weighted average maturity of 60 days or less.)

An Expanded Universe Enhances Return Potential

Source: PIMCO, 9/30/16

MINT has access to high-quality return opportunities by choosing from different asset classes, geographies and short-duration maturities.

Its average maturity is closer to 125 days.

This ETF also has access to other areas of the bond market. But, the PIMCO team won’t sacrifice safety for yield.

PIMCO brought this vehicle out in 2009 in response to the Fed cutting rates to zero in 2008.

So far, investors who know about this cash alternative are using it. MINT has accumulated almost $6 billion in assets. This asset size is not a shock when typical cash investments are paying zilch.

Plus, investors are putting their faith — looking for a little extra yield — in what’s quite possibly the best fixed-income brain trust in the asset management industry.

Jerome Schneider, a 20-year investment veteran and head of PIMCO’s short-term bond desk, is at the helm of MINT.

Compared to typical cash returns, shareholders have been thrilled with MINT’s returns. MINT has returned an annualized 1.17% (net of its 0.35% expense ratio) over its seven years in business. Over that time, cash — as measured by the Citi 3-Month Treasury Bill Index — has returned an annualized 0.09%.

MINT currently yields 1.29%. Move your cash to this ETF and earn 65X more than what your existing money market fund is paying.

***

The second option is the First Trust Enhanced Short Maturity ETF (FTSM).

This ETF is newer to market. It launched in August 2014 as a competitor to PIMCO’s MINT.

Worried about Rising Rates? This May be a Better Fit …

Source: First Trust, 12/30/16

Although FTSM and MINT are similar in many ways, there are some stark differences …

  FTSM has a longer average maturity (approximately 310 days vs. 125 days).

  FTSM, as you can see from its make-up above, has more of an emphasis on “floaters” (about 40% of the portfolio). Floaters are bonds whose coupon rates will adjust with market conditions. If rates rise, you’ll participate in the upward movement with FTSM.

  Lower expenses (0.25% vs. MINT’s 0.35%).

FTSM also has a little higher yield — 1.39%.

Whichever ETF you choose, you’ll earn a higher return than letting your cash sit in “cash.”

Switch No. 2: Choose ‘Reinvest’ Over ‘Cash’

Richard Russell, who has written the Dow Theory Letters since 1958, once said:

A stock dividend is something tangible — it’s not an earnings projection; it’s something solid, in hand. A stock dividend is a true return on investment. Everything else is hope and speculation.

From a historical perspective, dividends have accounted for about 70% of the S&P 500’s total return over the last 40 years.

Yes, you read that correctly. Here’s a chart for better illustration:

Source: Bloomberg, S&P Total Return Index (data through 12/31/16)

It’s the reason why most Uncommon Wisdom Daily recommendations — across our publications — are dividend-paying stocks or ETFs.

Related story: Scoreboard Check — 5 UWD Services Crush the Broader Markets in 2016

Provided you already own dividend-paying stocks, mutual funds or ETFs, there’s a simple move you can make in your brokerage account. It will dramatically increase your profits over the long haul.

Flip the “dividend reinvestment switch” to “on.” Instead of letting your dividends go to cash.

Here’s an example …

Since most investors own stocks, I’ll use classic blue-chip stock McDonald’s (MCD). McDonald’s has paid dividends for 40 years.

Look at the power of dividend reinvestment over time …

Owning MCD with Dividend Reinvestment ‘Off’ …

Source: McDonald’s Investor Relations

Owning MCD with Dividend Reinvestment ‘On’ …

Source: McDonald’s Investor Relations

If you just flicked on the dividend reinvestment switch 27 years ago (based on a $10,000 investment in MCD), you’d have an extra $44,000 today. All you had to do was simply choose dividend reinvestment!

From a return standpoint, it was the difference between making +1,653% (cash dividends) and +2,092% (dividend reinvestment).

You should be able to make the change from “cash dividends” to “dividend reinvestment” in your brokerage account very easily. Often, it’s a tool on the position’s page where you can change “reinvest?” from “no” to “yes.”

If you’re not able to do it yourself, call your online broker and have them make the change for you.

Providing you don’t need the cash immediately, flip the switch for as many stocks, mutual funds and ETFs as you can.

Start building your next big snowball today by letting the power of dividend reinvestment work in your brokerage account.

Switch No. 3: Think About Asset Location before Your Next Purchase

Asset location is a critical decision that must be made before you place any buy order in your brokerage accounts.

Asset location is the sensible distribution of investments to the most tax-efficient account type based on each investment’s tax impact.

For example, suppose you have spending cash in both your taxable and IRA brokerage accounts. And you’re about to buy a Real Estate Investment Trust (REIT).

Please don’t place the order in the first account that pops up on your screen. You need to think about the tax consequences first.

A REIT is taxed at ordinary income rates. So, if you buy it in your taxable account, you’ll be taxed anywhere from 10% to 39.6% on its dividends.

A REIT should be purchased in a non-taxable account if you have the opportunity to do so.

On the other hand, let’s say you want to buy a large-cap growth stock that doesn’t pay a dividend. And you plan on holding this stock for a long time. Place this purchase in your taxable brokerage account.

Since it pays no dividend, you won’t pay any ordinary income tax. And if you hold it for more than one year, it will be a long-term gain (0% to 20%) instead of a short-term gain (same rate as ordinary income) when you sell it.

Used wisely, this can slash your tax bill and grow your portfolio faster.

Assume you made a $250,000 investment in a taxable bond fund 20 years ago. The fund earned a 6% pre-tax return each year. Here’s what your position would look like two decades later if you had placed the order in three different types of accounts …

Don’t Pass up an Extra $72,446 over the Next 20 Years

Source: Fidelity

This is the monetary benefit of asset location.

Here are some asset location guidelines. This quick reference guide will highlight where to place different types of investments to achieve maximum after-tax returns (be sure to consult your tax advisor or accountant if you’re still unsure):

Asset Location Cheat Sheet

Source: “The Key to Tax-Efficient Investing: Asset Location,” Forbes.com

With asset location, the goal is to shelter your investments from higher tax rates. By using this methodology, you’ll allow your brokerage accounts to generate higher after-tax returns.

Tomorrow I’ll return with three more changes you can make to your brokerage account for maximum profits in 2017 and beyond.

Best,
Grant Wasylik

Your thoughts on “3 Ways to Make Your Portfolio Shine in 2017”

  1. Hi Grant M.! Grant W. wanted me to pass along his thoughts to you …

    This is not one of our current recommendations. But, I am familiar with this closed-end fund and happen to think it’s an attractive investment.

    CEF is trading at a 8.6% discount (larger discount than its historical average – for example, 3-year avg. discount is 5.8%). The fund is made up of approximately 60% gold and 40% silver.

    As for your specific questions…

    1) Yes, you should be able to buy CEF in an IRA.

    2) Taxable account purchase… This closed-end fund automatically gets you a tax break from the 28% collectibles tax rate. You should only pay the standard cap-gains tax rate of 0%, 15% or 20% depending on your tax bracket. Not: If you’re a US investor, you may have to file Form 8621 (extra paperwork) due to CEF’s PFIC status.

    3) IRA account purchase… Regular tax savings should apply.

    4) A couple disadvantages would be that gold and silver prices continue to decline. Also, if gold and silver sentiment gets bearish – because this is a closed-end fund with limited shares available – this would, presumably, affect its price to the downside.

    You can find out more information of the website, here. Might even be worth giving them a call (you can find their phone number at their site): http://www.centralfund.com

  2. Can a purchase of CEF Central Fund of Canada shares/units be made from an IRA.? Is there any advantage to purchase such a vehicle in a tax sheltered account. As any gains would be taxed as ordinary income rather then Cap Gains. What are the disadvantages of investing in this closed end fund which holds approx 90% of its funds in allocated gold & silver accounts.

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Originally from Pennsylvania, Grant graduated from Juniata College with an economics major and accounting minor. Since graduation, Grant has worked in the investment industry for almost two decades by serving in various roles … Prior to coming to…