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Step 7 - Reduce investment expenses and control investment taxation
Category : Financial Planning -- 10 Personal Steps in the Right Direction
Reduce investment expenses and control taxation
7 of "10 Financial Planning Steps in the Right Direction"
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Even with optimal investment strategies,
there is still substantial room to improve upon net investment
performance through continued and vigilant focus on
investment costs and tax realization.
The fees extracted by the
financial securities industry increased substantially during the last
two decades of the 20th century on both a total and a percentage of
returns basis. At the same time industry deregulation, market
innovation, and increased competition provided many new and useful
mechanisms for investors to manage their assets in a much more cost-
and tax-efficient manner.
This important step focuses on investors’ net or
investment returns – the returns that investors could
spend. Adopting investment strategies based on scientific finance is
the first part of investment cost reduction. Many such strategies are
inherently more cost-efficient, which contributes to improved
risk-adjusted returns. This is not surprising, because a fundamental
goal of investment science is to discover strategies to maximize
personal economic welfare on a risk-adjusted returns basis.
Skilled investors must carefully control known and hidden
investment costs and taxation to ensure that they obtain maximum net
returns from their hard-earned investment assets.
This step again also
investors’ attention to the potentially negative personal
financial impacts of biased and sub-optimal advice. The conflicts of
interest between individual investors and the financial services
industry continually threaten individual investors’ returns.
The financial services industry offers products and services
investors to buy at prices that include the market value of the
investment securities plus the costs and profits related to the sale
and transaction. Often the true cost of the industry’s markup
obscured or hidden.
Investors need to understand that their
interactions with the financial markets through these industry
intermediaries are a “zero-sum game.” In and of
industry does not create value, but it can siphon away a significant
portion of investors’ potential returns through visible fees
Particularly with the abnormally high market returns for
equities-based securities during the last two decades of the 20th
century, many investors became very lax about managing investment costs
and tax realization. The fees extracted by the financial securities
industry increased substantially during this period on both a total and
a percentage of returns basis. At the same time industry deregulation,
market innovation, and increased competition provided many new and
useful mechanisms for investors to manage their assets in a much more
cost- and tax-efficient manner. Many investors need to give this topic
a far higher priority. (See: Excessive investment costs are a huge problem
for individual investors and Passive individual investors are
“free riders” who benefit from the higher costs of
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