• Fend off Uncle Sam. Four in five millionaires say taxes are a major factor in their investment decisions, according to Spectrem. For good reason. Research by Vanguard and T. Rowe Price shows you can lose as much as two percentage points annually to taxes. Yet there are plenty of ways to make some of that up.
How? Here again, index funds help. Over the past 15 years stock index funds have lost 0.8 percentage point less a year to taxes than actively managed portfolios.
Next, be mindful of where you keep your investments. Buy-and-hold equity index funds, because of their inherent tax efficiency, can be held in taxable accounts. But funds that throw off short-term capital gains or interest income, such as actively managed growth funds or bond funds, should be stashed in tax-advantaged plans like 401(k)s and individual retirement accounts.
Yet an analysis of Vanguard IRA customers found that only two in five are keeping their active equity funds in IRAs and only 18% own their bond funds there. That’s a costly mistake. Vanguard found proper “asset location” can boost the value of a balanced portfolio by up to 11% over a decade.
If you must hold stock funds in a brokerage account, go with a tax-managed option. T. Rowe Price Tax-Efficient Equity (PREFX) minimizes taxes through various means, including selling losing shares to offset gains. That has helped it beat the S&P 500 by an average of nearly one point a year for the past decade.
• Curb your enthusiasm. It’s hard to resist the temptation to chase a highflier. But ultra-high-net-worth investors, Spectrem found, consider past performance far less than risk, diversification, taxes, and reputation when it comes to picking an asset or security.
That approach helps preserve gains. Morning-star found that investors lost 2.5 points a year on average over the past decade by chasing what’s hot and getting in too late, rather than buying and holding.
Focus instead on strategies that can help you manage your own behavior. A study last year at Goethe University Frankfurt found that households that successfully built wealth had better self-control as measured by their ability to set goals, monitor their portfolio, and commit to their objectives.