Rate of Return: Let’s Get Real

A wise person once said, “Invest in inflation. It’s the only thing going up.” Jokes aside, that is some pretty smart advice. It’s no secret that prices for goods and services continue to rise at an aressive rate. If your portfolio fails to keep up, you won’t see the growth needed for a comfortable, secure retirement years down the road. (You know, when a gallon of milk costs $10…)

Beyond inflation, your portfolio is also at risk of other complexities like liquidity, risk, taxation and protection benefits. These factors affect each of the six LBS® asset classes differently, but none is quite as significant as potential rate of return (ROR).

In order to grow your wealth consistently and successfully over a lifetime, the key is to maximize your rate of return by allocating your assets wisely. ROR can involve a serious bit of math, but at its simplest, ROR is the percentage gain (or loss) on your initial investment.

Consider the following hypothetical scenario:
You invest in a stock. At the end of the year, you earn a 12% return on the investment. But because the inflation rate was 2%, your rate of return drops to 10%. Still, you decide to sell the stock at a profit. The federal and state taxes you pay reduce the figure further, say by another 4%.

Your 12% rate of return, adjusted for two simple factors, is now just 6%. Not so exciting…

You see, financial planning isn’t just about savvy investments, but about savvy investing. As shown in the example above, the country’s economic climate (among other things) influences the success of your portfolio. Chasing impractical rates of return is not the answer. Managing your assets effectively is what’s crucial to long-term financial health.

True, many factors are outside your control. But one thing I always remind clients to do is always diversify. It’s not just important to consider the rate of return on different stocks, bonds, businesses and real estate, but disciplined savings offers its own kinds of return. In times of economic downturn, having a reserve of cold, hard, liquid cash helps in the following ways:

• If markets take a dive, you have enough to live without borrowing
• Using cash means you avoid having to sell off your investments
• In times of extreme recession, you can buy assets at a bargain
• Through all market cycles, you have priceless financial confidence.

So, if you want to get real when it comes to your net worth, strive for balance. With a healthy mix of cash savings and investments, it’s possible to grow your wealth without taking too much risk with your hard-earned money.

*Based on a 33% marginal tax rate, depending on the nature of the stock purchase. If they want to look at it as capital gains, it would be just 20% or so.