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What Is Your Portfolio’s REAL Return?

To maximize investment growth over time, it’s critical to factor in the effects of fees, taxes and inflation on your returns. Many posted investment returns explicitly exclude the effects of fees, which come right off the top of each year’s gains. It’s important to dig deeper and find out how much that performance is costing you each year so you can decide which investments will serve you best.
Taxes can also take a serious bite out of your investment gains each year so it’s important to structure your investments to account for taxes on capital gains, dividends, and income. Taxes should not be the primary driver of an investment strategy, but incorporating tax efficiency into your overall plan will help you keep more of what you earn. If taxes are a problem for you, structuring your investments so that taxable investments can grow in a tax-deferred account may be an option. Synergy Financial Advisors can help you with this.
Inflation, which is the erosion of your purchasing power over time from increases in the cost of goods, is another insidious force that can eat away at investment growth each year.
An investment strategy that fails to account for the effects of fees, taxes and inflation on overall return will severely handicap your ability to increase your wealth over time because if you do not build these factors into your investment plan, you will lose your most valuable commodity…time.
After some research, you may find that an investment with a lower return may actually have a higher total return once you account for taxes, fees, and inflation.
A candy bar that cost 25 cents in 1975 costs over a dollar today, due to the effects of rising prices. That same candy bar would cost approximately $1.30 in 2020 if there is annual inflation of 4% per year. Consumer prices have risen each year in the United States. Since the U.S. Department of Labor began tracking consumer prices, the average annual inflation has been 3.22% each year, which means that what cost one dollar in 1913 costs $23.51 today.
To put these numbers in the context of investments, an assumed inflation rate of 4% will reduce the value of a $100,000 portfolio invested today to approximately $67,500 in just ten years; this means your investments would have to grow to $148,000 during that time period … a 48% gain … simply to keep pace with inflation…and this number doesn’t include the effects of taxes and fees on investment performance.
Another good axiom to remember is that it is usually wise to avoid following the herd. By the time your friends, family, neighbors and the newspaper columnists are all investing in a particular sector or security, it’s often too late to benefit you because the hype has already inflated the price. Whenever investment dollars rush in, prices soar and savvy investors usually move on. By the time the mass of average investors have caught on to a new fad, prices are often too high and investments are overvalued, making them a poor choice for investors seeking value.
The herd mentality is a well-documented pitfall among investors and it can have striking consequences for investment performance. Investment clubs, which were popular during the 1990s, were studied with regard to the dangers of group-think. These clubs, composed of amateur investors, often favored certain sectors and investment types to the exclusion of all other types. Researchers found that portfolio returns of investment clubs lagged the S&P 500 index by 3.7% per year, meaning that members did worse as part of the group than the market overall during the same period.
When you seek financial advice, select and work with a Certified Financial Planner®. A Certified Financial Planner® has the training and experience to professionally guide your investment decisions. We recommend you hire a CFP® who is independent and not associated with any investment company so you receive only unbiased recommendations. Your CFP® should also be fee-based, not commission-based, so you know your financial advisor’s priority is solely your best interests.
We hope this article provided insights about the value of reviewing your investment portfolio’s actual performance to make sure you receive the best return for your financial security and future. Please contact us so we can review the possibilities for enhancing your investments’ return.
Synergy Financial Management, LLC
701 Fifth Avenue Suite 3520
Seattle, Washington   98104
ph: 206.386.5455
fx: 206.386-5452