You can increase the value of your portfolio by 2% by considering the impact of taxes on your investments. By considering the impact of taxes, you save thousands of dollars on your tax bill year after year.
A way you can be a more tax-efficient investor include learning the basics of asset location. Asset location means placing assets that generate more income in a tax-advantaged account.
Assets that should be in a tax-advantaged include any actively managed funds, Real Estate Investment Trusts and most bond funds. The reason is that most of those funds generate return of capital, capital gains, and most bond funds give monthly dividend payments.
Assets that should be placed in a nonretirement account include tax-managed funds, most exchange traded funds, most index funds, individual stocks, and municipal bonds. These assets tend not to distribute capital gains and for that reason are tax-efficient compared to list given in the last paragraph.
Considering the impact of taxes would increase your portfolio’s performance and increase its nominal value. You may not think that a meager two percent matters but two percent means that a portfolio could potentially have a larger sum of money. For instance, a portfolio that has achieve a one million dollar mark has a nominal value of roughly $700,000 after considering how much has been paid in taxes over the years.
Consider the following graph above to best illustrate the impact of taxes on your portfolios performance over a lifetime. A favorite site that best supports the importance of taxes of your portfolio’s performance is the Forbes’ article on “Want to Boost Investment Returns? Start with tax management.” Click the link below to be redirected to the Forbes site.
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