Ways to Help Improve Your Portfolio Holdings

Though the list is much longer, as a general rule, there are six things you should seriously consider doing if you want to build a successful investment portfolio that can help your family amass capital, build wealth, generate income upon which to live, and leave a legacy for your children and grandchildren. Some of the items on the checklist may sound overly simplistic, perhaps even trite, but they are vital to reiterate because too many new investors, on too many occasions, think they can ignore these rules and still do well. It rarely works out in their favor.

The specifics of how you implement each concept will differ based upon your own personal situation, so it is important that you seek the advice of a qualified tax professional and investment advisor.

1. Decide Upon a Clear Objective for Your Investment Portfolio

We’ve talked about this idea before and I’ve even gone so far as to explain the three reasons your investment portfolio should have clearly defined objectives. You need to know what you expect of your money. Otherwise, you are going to be like a ship rudderless at sea; no direction, no purpose. That’s a terrible situation in which to find yourself, especially as you begin to draw closer to retirement.

2. Keep Investment Turnover to a Minimum

As the saying goes, don’t rent stocks, buy businesses. Turnover has been shown to correlate with poor investment performance. If you aren’t willing to own a business for at least five years, don’t even consider buying shares unless you fully understand, and accept, that the short-term stock market is irrational, volatile, and capricious. You should want to hold things that grow more valuable over time, producing higher earnings per share and fatter dividend checks.

3. Control Costs By Keeping Investment Expenses Low

Every dollar you give up in fees, brokerage commissions, sales loads, and mutual fund expense ratio charges is a dollar that can’t compound for you. What seems like a small amount of money every year can end up costing you hundreds of thousands, or even millions, of dollars in lost wealth that you can never recover; money that went straight into the pocket of big banks, Wall Street, and executives.

4. Structure Your Investment Holdings in a Tax Efficient Manner

The two greatest investment tax shelters available to the lower and middle classes in the United States are the Roth IRA and the 401(k). Both have unique rules, contribution limits. and tax benefits, but they can be incredibly lucrative if you manage them correctly. To see how this would work in the real world, imagine that you are 18 years old. You diligently put $5,500 per year into a Roth IRA and invest the money at 8% compounded, per annum, until turning 65. When you retired, you would have just shy of $2,500,000 in your account.

When money is held in a Roth IRA, there are no taxes on the capital gains, dividends, interest, or many other sources of income. That means you could then sell your entire portfolio of holdings, invest the proceeds in real estate and high yielding dividend stocks, such as shares of the oil giants, and collect cash income of more than $200,000 per year. Every December, you would take a withdrawal of that $200,000 from your IRA to use as income, paying no taxes. Zero. Nothing. It’s all tax free. None of it goes to the government. It’s the single greatest retirement gift Congress has ever given the average American.

In fact, it is so good, there has recently been discussion in Washington about limiting the tax benefits to only the first $3,000,000 held in IRAs because people are now learning to take advantage of the situation.

5. Never Overpay for an Asset

There is no getting around it: Price is paramount to the returns you ultimately earn on your investment portfolio. I’ve written real-world examples of this in the past using Wal-Mart Stores as an example of how investors can become insanely overoptimistic one year, and then depressingly pessimistic the next. You cannot buy a stock at an earnings yield that is a fraction of the Treasury bond yield and expect to do well unless it is a turnaround situation that actually turns around, or a start-up with a very high rate of growth.

6. Don’t Rely on a Single Investment, or a Handful of Investments

There is no reason you should have a lot of your money in a single stock unless you are very good at business, could suffer the total loss of your principal, and have a thorough understanding of the enterprise. If you are looking for high quality blue chip stocks that pay 3% dividend yields, why rely on a single firm? You could easily find a dozen companies with the same characteristics, diversified across sector, industry, management team, and even country, if you wanted to invest internationally. A successful portfolio is one in which the owner is unaffected if a single company goes bankrupt or cuts its dividend. Sure, you don’t like to see it, but things should just keep rolling on as the money comes in quarter after quarter, year after year.