It’s a classic trap and one that we all get caught on at some point. Whenever you start calculating how much you need in your passive income portfolio to live off of it. Or how much your “number” is to retire on… or when you look at your annual returns. It’s always tempting to change a few basic assumptions. For example, instead of targeting a 5-6% return, why not be more aggressive and go for 10%? It would help you retire earlier, need less for retirement, have your assets grow faster, etc. It’s a huge temptation to turn on the switch, go for emerging markets, derivative products, etc.
It’s not about making your portfolio riskier
I would argue that it’s generally a bad idea though. Your target return and asset allocation should not be determined by how long it will take you to reach your retirement age. It should be determined by your tolerance to risk and for volatility in returns. The question then becomes… how can you make your portfolio grow faster? Here are a few methods I would suggest:
Consider taxes when investing
Obviously, invest as much tax free money as you can in retirement accounts. The impact of no taxation over long periods of time is incredible and easy to underestimate. There are very few reasons to not try to max these out. For all other accounts, consider tax impacts of buying tax exempt municipal bonds or selling specific positions that will generate capital gains, etc. It’s easy to underestimate the importance of minimizing taxes paid on your investments.
If your employer is giving you money, take it
Many companies offer subsidies if you purchase your employers stock. In almost all cases, it’s significant enough to be taken advantage of. You should buy as much as you can to get the “free money”. Then, simply be disciplined enough to sell it over time according to the specifications that are applicable. You might not be able to sell it for a few months, a year or more and that is fine. But start selling it when you can to remain diversified.
Make it automatic
There’s no better way to increase your investments than to make your contributions automatic. Take them out on pay day so that you’ll never have seen (or spent) the money and it will become a habit. By year’s end, you will be shocked at how much you saved. If you feel like you can’t, start with a few dollars and increase it over time little by little. Over your life, that amount will make an incredible difference.
Reinvest one time amounts (gifts, tax refunds, inheritance)
When you receive significant amounts either from the government, as gifts, etc. Be sure to save the majority if not all of that amount. Not only will it help your investments but it will also help you avoid jumping into expensive adventures such as buying an incredible car which will end up costing you in insurance and other costs.
Invest away a big part of your next raise
If you get a raise, don’t get used to it. For example, if your new pay nets you 100$ more per month, increase your automatic savings by 75-80$. That will give you some joy but will mostly help you save a lot more without actually having to diminish your living level. Over time, this can mean big rises in your automatic savings which as I stated before, are the major key in helping your portfolio get bigger faster.
Save on taxes
Either get an accountant or get the information yourself but make sure you are aware of any strategies, deductions or any kind of action that will help you diminish your taxes. Remember that will help increase your tax returns which will be invested away. Saving a few hundred or thousand dollars can mean a huge difference over time. The compound effect is your best friend.
Manage your money yourself
I’ve written about this in the past but if you can manage your money yourself, you will be saving a huge amount of money over time for many different reasons. You will save on management fees, transaction fees and in many other ways. The great thing about it is also that you will end up knowing much more about your finances and feeling confident about it. It does require some work but it’s well worth it and much easier than you could imagine.
No mutual funds
Why pay 2% of annual fees on your money when you can pay less than half through ETF’s, and often many times less. I have written about ETF’s and mutual funds in the past and as your assets grow, this becomes even more important to help you grow more quickly.
Minimize trading fees
If you manage your own portfolio, you will already likely see less trades happening and have more control over them. In most cases, there’s no point in trading every week and even less point in trading every day. You can only try to stick to your plan and that will go a long way.
What are the ways that you use to make your portfolio grow more quickly?