Investors spend untold hours researching stocks, bonds, and mutual funds with good return prospects. They read articles, watch investment shows, and ask friends for help and advice. But many of these investors could be overlooking another way to potentially add to their returns: tax efficiency.
Investing tax-efficiently doesn’t have to be complicated, but it does take some planning. While taxes should never be the sole driver of an investment strategy, better tax awareness does have the potential to improve your returns. Morningstar estimates investors gave up an average of 1% to 2% of return per year to taxes for the 90 years through 2016. Let’s say a portfolio could earn 8% per year instead of 6%, that extra return of 2% per year on a hypothetical portfolio of $100,000 could result in an additional $1 million after 40 years.1 This could be one of the best investment decisions you make this year, or any other year. Here are some tips.
There are several different levers to pull to try to manage taxes: selecting investment products, timing of buy and sell decisions, choosing accounts, taking advantage of losses, and specific strategies such as charitable giving can all be pulled together into a cohesive approach that can help you manage, defer, and reduce taxes.
Of course, investment decisions should be driven primarily by your goals, financial situation, timeline, and risk tolerance. But as part of that framework, factoring in taxes may help you build wealth faster.
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