Are you an efficient investor?
September 12, 2013
Generally speaking, if you're efficient at a particular task, you'll get good results without wasting effort.
As you've already learned from your life experiences, it's usually far better to be efficient at something than to be inefficient — and that's certainly true with investing.
So, what can you do to become a more efficient investor? Here are a few ideas:
• Invest systematically. If you put a few dollars in an investment, such as a stock, that you heard was "hot," and then a few months later put some more money in another vehicle that strikes your fancy, and you continue this pattern indefinitely, you may not be maximizing your resources. By taking this type of haphazard approach, you could end up owning a bunch of investments without rhyme or reason — a motley assortment that may not help you reach your goals.
Instead of following this route, consider a systematic approach, sometimes known as dollar cost averaging. To do so, you'll first want to identify some investments that are appropriate for your objectives, risk tolerance and time horizon. Then, automatically move the same amount of money each month from your checking or savings account into the investments you've chosen. When the price of your investments falls, your contribution will buy more shares, and when the price rises, you'll buy fewer shares — in other words, you'll be fulfilling the "buy low" part of the classic investment formula. Over time, this technique should result in a lower average cost per investment.
Keep in mind, though, that dollar cost averaging does not ensure a profit or protect against loss — and you'll need to have the financial resources available to continue investing, even in "down" markets.
• Reinvest dividends. Among your investments, you may own stocks that can pay dividends. You can take these dividends as cash, but if you don't need the money to meet everyday expenses, you may be better off by reinvesting the dividends.
This is an efficient way to increase your shares — and boosting your share ownership in quality investments can be a key way to help build wealth. (Be aware that companies can reduce or discontinue dividends at any time.)
• Look for tax-efficient techniques. Another type of efficiency associated with investing is tax efficiency, which refers to your ability to defer taxes as long as possible. Tax-deferred accounts, such as a traditional IRA or a 401(k), can help you put off the tax bill until retirement, when you may be in a lower tax bracket.
• Consolidate investment accounts. If you have one IRA with one financial services provider, another IRA with a second, and a separate investment account with a third, you may end up paying more in expenses, fees and commissions than is necessary — and since these costs can eat into your investments' "real" rate of return, this scattershot ownership method may be inefficient. You may be better off by consolidating all your investment accounts with one provider.
Seek to become an efficient investor. You may be pleased with the results.
Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway, in Fallon. His telephone number is 775-423-8552.