Successful investing is not about picking the next Apple. It’s not about beating the market one year… only to be crushed by the market the next. Successful investing is about what you can control.
Can you decide what the price of oil will be? The direction of interest rates? The well-being of the economy? Can you determine the impact of a government’s laws or the amount of a corporation’s profits?
The truth is, you don’t have a lot of control over the things that may or may not affect your investments. And that can be pretty scary. On the other hand, you do have the power to control how much your investments will cost (expense) and how much they will pay out in distributions or dividends (yield).
You also have the power to determine the outcome on every investment that you will ever make. There are only 4 possible outcomes — a big gain, a small gain, a small loss and a big loss. The successful investor uses several investment techniques to ensure a big gain, small gain or small loss, avoiding the only bad outcome (i.e., the big loss).
1. Lower Your Investment Costs
The lower your investments costs are, the higher your investment returns will be. One reason that we use exchange-traded funds (ETFs) is because they tend to carry the lowest internal expense ratios. For example, a portfolio filled with index-based ETFs might average 0.3% to 0.5% annually whereas a portfolio of traditional, actively managed, stock mutual funds might average 0.9%-1.1% per year.
That 0.6%-.8% makes a huge difference in your ultimate success. Imagine the $1000s of dollars in mortgage savings if you refinanced down to 4.25% from 5.0%.
2. Raise Your Investment Yield
The higher the overall yield from your total portfolio, the greater your investment returns will be. Does that mean you should chase an asset that boasts the highest dividend payout or largest coupon payment? Not at all. It simply means that the more interest or dividend income you accumulate, the less your account(s) needs to gain in price.
Some folks mistakenly assume that they need stock prices to soar — year after year — to achieve their annual goals. Yet, successful investors understand that a wide range of lower risk diversifiers (e.g., Dividend ETFs, Preferred ETFs, Covered Call CEFs, etc.) can lead to more lucrative results.