Rate of Return: Let’s Get Real

June 12, 2019

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.

You may also like

3 Questions for Your Financial Future. Part 1

The first few InFocus articles were testing ground. Along with the positive feedback, we also learned about our readership’s appetite. Heads of household, homemakers, businessmen...

3 Questions for Your Financial Future. Part 3

To finish out our three-part column on creating your brightest financial future, let’s talk about smart money management. That means making your money work for...

3 Questions for Your Financial Future. Part 2

Last week we explored timing in relation to financial planning. Still, you may be wondering: Once I get married and move on from the comfort...

The Future of the InFocus Column

What you can expect over the coming months The first few InFocus articles were testing ground. Along with the positive feedback, we also learned about...

From Roof to Foundation

An introduction For our debut series, we’re exploring the core of our entire financial philosophy. Much like a house, your financial map depends on multiple...

Where There’s a Will, There’s a Way

According to our home metaphor, protection come before assets, before liabilities—even before the income you bring in each month. The fact is, without adequate protection,...

A Matter of Life and Death

Estate planning isn’t exactly glamorous. But like other aspects that make up the ‘roof’ of your financial home, life insurance is essential to protecting your...

With Wealth Comes Worry

America is the land of the litigious. In other words, it’s a lawyer’s market. From scalding hot café drink to cracks in the rich neighbor’s...

Raising the Roof

Series Recap As discussed over the past 4 articles in our All Under One Roof series, it pays to stress the importance of minimizing risk....

Assets & Liabilities

An Introduction In our last InFocus series, we explored how protection is so critical to your wealth and prosperous legacy down the generations. You may...

Mid-Series Checkup: Did you get all that?

So far in our ‘Net Worth’ series, we introduced you to assets and liabilities. We also broke down how the economy and other factors can...

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...

How to grow through tax season

Last time, we let you know how the tax impact of compounding negatively affects your net worth. In other words, we (gently) hinted at the...

Why compounding isn’t always cool

Did you know tax liability plays a huge role in determining your net worth? Just because an investment is making money doesn’t mean you get...

Planning Your Financial Future

While most people already understand the importance of financial planning, many of us start working and earning money long before planning seems necessary for retirement....

Arrow Prev
Arrow Next

Check the background of our investment professionals on FINRA’s BrokerCheck

Broker Check