4 Pillars of Successful Long Term Investment
Investing is not a science where you apply a certain rule and get the output. It is an art, the correct strategy can change your life, and the wrong one will destroy your wealth. When we talk about the investment, it is a long-term process no one can be a billionaire by an overnight.
Today we will talk about the Four Pillars of Investment:-
1] Tax Efficient Investments –
The investment management market emphasizes on total investment returns before taxes, and generally does not focus on the more important after-tax returns. This is a huge mistake, because what really matters is how much money you’re left with after taxes. To maximize after-tax returns, investment advisors must optimize which assets are held in which types of accounts and what types of securities should be held based on the client’s tax bracket. Additionally, turnover (how often the underlying securities are traded) can impact whether an investor pays long term capital gains taxes or ordinary income taxes on gains. Without a strong tax-efficient investment strategy in place, taxes can eat up much of investors’ gains.
These are few tax efficient investments that not only help you save tax but also help earn tax-free income. But, not all are the same in respect of features and asset-class. Thus, making the right choice is essential.
2] Low Expense Ratio –
Investment fees are often an overlooked damage to overall investment performance. When it comes to investment advisors and money managers, there are generally multiple layers of fees, with each layer of management requiring fees which are collectively called as Expense Ratio. Ultimately, excessive layers of fees, load mutual funds, and fees that are simply too high, will erode the overall investment strategy’s performance and hinder the investor in achieving their financial goals.
These are average expense ratios for basic fund types:-
- Large-Cap Funds = 2.1%
- Mid-Cap Funds = 2.2%
- Small-Cap Funds = 2.3%
- Multi-Cap Funds = 2.15%
- Foreign Stock Funds = 1.50%
- S&P 500 Index Funds = 0.15%
- Bond Funds = 0.90%
- ULIPs = 3-5%
- NPS = 0.1%
3] Asset Allocation Strategy –
An asset allocation investment strategy uses cost and tax efficient investments diversified across all major asset classes. For example, stocks, bonds, commodities and real estate. Each portfolio should maintain risk levels and market exposures appropriate to the client’s unique situations and requirements. Portfolios are periodically rebalanced to maintain proper allocation diversification. This done to take advantage of cyclical swings in relative asset valuations. The impact of effective asset allocation creates a pull on net investment returns. A one-size-fits-all collection of investments and lack of proper asset allocation strategy results in poor long-run performance.
Different types of asset allocation strategies are as follows:-
- Strategic Asset Allocation
- Tactical Asset Allocation
- Dynamic Asset Allocation
- Constant Weighting Asset Allocation
4] Diversification –
The most important foundation of investing is diversification. In simple terms, diversification reduces portfolio volatility. In case of equities, having exposure to multiple styles and sectors can reduce downward risk, while capturing market-like returns over the long term. While a diversified portfolio will always lack the hottest-performing sector, style, or index. It will provide the optimal structure for avoiding devastating losses. Appropriate diversification maximizes risk-adjusted return. Diversification smoothes the level of returns as much as possible. Diversification is a sophisticated valuation approach focusing on identifying the strongest of individual securities for selection in our portfolios.