Some investors get caught up in the emotions of the market as stock prices go up and down. Instead of focusing on the market and stock prices, investors are better off focusing on what they can control when investing.
Here are five things you can easily control to increase your returns.
How much you save
The more you spend, the less you save. And the less you save, the less there is to invest. If you’re able to increase your savings rate, you can invest more and earn more from investments in the future.
Imagine investing $100 per month, equating to $1,200 per year. If your rate of return is 7%, in 10 years’ time, you will amass about $17,000. But if you invested $300 per month, equating to $3,600 per year, you would amass more than $51,000 in the same period.
Quality of your investments
If you focus on buying quality businesses such as Canadian National Railway Company (TSX:CNR)(NYSE:CNI), you can count on them being around even 10 years from now. You don’t need to worry about it as you would for a penny stock, which is commonly more volatile than the average stock.
Even though Canadian National Railway is in a cyclical business, the railway leader still managed to increase its dividend for 20 consecutive years. In the last decade, it hiked its dividend 17.5% per year on average.
Valuation of new buys
By managing your own portfolio, you can control the valuation of any company you buy. For example, you might argue that Canadian National Railway is expected to experience slower growth this year, so it’s not worth what it’s trading at, which is 18 times its earnings. So instead, you would wait until it trades at the low $70 level before considering buying it.
If investors can control themselves to buy quality companies that are priced at discounts, they can increase their overall returns. When we think in terms of decades, a difference of a 1% return can mean thousands of dollars more for your retirement fund.
Investors can reduce their taxes on their investments, which in turn increases their returns. Understanding which accounts to hold different types of investments is helpful in boosting your returns.
For example, interest rates are taxed at the marginal rate, so investors might choose to hold interest-producing investments in a TFSA or RRSP. Alternatively, high-yield U.S. stocks that pay qualified dividends should be held in an RRSP to avoid foreign withholding taxes on their dividends.
High-growth stocks intended for capital gains can be held in a non-registered account because only half of the gains are taxed at the marginal rate when they’re sold. However, if investors have room in a TFSA, they should invest there to avoid taxes altogether.
Then, there’s the decision of whether to invest in a TFSA or an RRSP, both of which lead to tax savings that boost your returns.
Investors can lower their costs by limiting the number of trades they make. For example, you might only invest once a month or every two months. Investors can also choose to hire a financial or investment advisor for professional advice.
Investors can reduce their spending to increase their savings rate and investment amounts. They can also choose to invest in quality businesses when they’re priced at discounted valuations and hold them in the appropriate accounts. By controlling these five things, investors can reduce costs and maximize gains from their investments.