On Super Bowl Sunday, the U.S. government announced it will no longer mint new pennies because, according to the U.S. Mint, each one costs nearly 4 cents to produce.
If that math makes you scratch your head, you’re not alone.
Even in the age of political polarization, this seems like an idea a majority of Americans can support. Let’s have a little more sense and a lot less cents. Sometimes the simplest solutions are the easiest ones to overlook.
If we apply that same approach to investing, it might surprise you how many simple steps you can take to make your portfolio more efficient. Here are a few worth sharing:
Save money in the right bucket
If your taxable income allows you to contribute to a Roth IRA, do it. If your company has a 401(k) plan and offers an employer match, you should contribute at least the amount needed to receive the full match. If your income lands in a higher tax bracket, you’ll want to save as much as you can in pre-tax accounts before utilizing brokerage or nonqualified ones.
Hold the “growthiest” investments in IRAs
An investor who owns growth stocks, value stocks and bonds doesn’t need to have an equal share in every account. Roth IRAs offer the most advantageous long-term benefits (tax-free growth) so it’s a great place to hold more aggressive investments with the highest growth potential. Traditional IRAs still offer tax-deferred growth. Joint, trust and other nonqualified accounts are a good fit for more conservative investments like bonds, especially if you have withdrawal needs.
Understand your fees
Even if you don’t have an adviser, you’re paying fees. Investors don’t receive a bill for internal expenses, but they reduce your returns just the same. Data from Morningstar showed mutual funds and ETFs charged 0.44% per year on average in 2023. On a $250,000 portfolio, that’s more than $1,000 every year. Eliminating mutual funds in favor of individual stocks and bonds is the approach we prefer. If you want built-in diversification in one product, use index funds instead.
Be mindful of taxes
The larger your portfolio, the more important tax efficiency becomes. Mutual funds are inefficient from a tax perspective. Alternative investments and hedge funds are even worse; and don’t get us started on annuities. You’ll have much more control of realized gains if you own individual stocks or index funds. Tax-loss harvesting should be a priority even with investments you might love. You can always buy them back 31 days later. High earners should consider municipal bonds instead of corporates.