Investment Strategies

The universe of investing is quite expansive.  Managed accounts are typically utilized when a financial professional is helping you select your investments.  These accounts can be discretionary (where the advisor is making all decisions) or non-discretionary (where the advisor makes recommendations, but you make decisions).  Non-managed accounts are typically referred to as brokerage accounts or commission-based accounts.  With managed accounts, a percentage of the account comes out as a fee.

One advantage of managed accounts is that the universe of investments is massive.  Because of this, many people roll their 401(k) over to a managed IRA when they leave an employer.  It is possible to invest in stocks, bonds, mutual funds, ETFs, CDs, treasuries, money market accounts and alternative investments.  In addition, managed accounts allow you to purchase institutional-class shares of mutual funds, which typically have lower internal fees than retail accounts.

Non-retirement investment accounts produce taxable income.  Any interest or dividends are taxed.  If you sell a security for a profit, you may need to pay capital gains taxes.  Mutual funds can also distribute capital gains, which is phantom income that is taxed.  There are a few key tax strategies to consider.  If you invest in municipal bonds (either individual bonds or in a mutual fund), the dividend is tax-free at a Federal level.  If you invest in Massachusetts municipal bonds, dividends are tax-free at both a Federal and State level.  A second strategy to consider is investing in equity ETFs versus mutual funds.  Most equity mutual funds produce phantom income when they distribute capital gains.  In contrast, most ETFs do NOT distribute capital gains phantom income.

Tax loss harvesting is a third strategy which can result in significant tax savings.  With tax loss harvesting, you purposely sell an investment that has lost money (known as a capital loss).  Capital losses can be used to offset capital gains.  You can also use $3,000 per year of capital losses against other forms of income.  Capital losses carryover from year to year until they are utilized.  Be aware of the wash sale rule.  Capital losses will not be realized if you buy the same or substantially identical security within 30 days before or after the sale. 

There are many different ways to measure success in investing or determining “the best” mutual fund to invest in.  Two of the statistical measures I favor are Alpha and Beta.  Alpha is a measure of how well an investment does on a risk-adjusted basis.  If an investment has a positive Alpha, it returned higher than its benchmark.  Beta is a measure of risk versus a benchmark.  If an investment has a Beta above 1, it is riskier or more volatile than the benchmark.  So, in an ideal world, you want investments that have a positive Alpha and low Beta.

One final critical strategy is to diversify your investments, or not to put all of your eggs in one basket.  You should have diversification on two levels.  First, you should invest in multiple securities.  For example, you might invest in two large company growth funds.  Second, you want to diversify your asset allocation, or broad categories of investments.  Broad categories of asset allocation include equities (stocks), fixed income (bonds), cash and alternative investments.  Each of these has sub-categories, such as large companies, medium sized companies, small companies and international companies.  Research shows that diversified portfolios often provide higher returns with lower risk.  This is because different types of investments have varying performance and volatility.  For example, large company stocks might do really well this year and not so well next year, but medium sized companies might not do well this year, but do better next year. 

Lars Lambrecht, Rehoboth resident and Certified Financial Planner, is available to answer questions or meet for a consultation.  617-947-6428