Investment Approach

Controlling costs is the only certain way to impact investment performance because unlike market returns, we can know what costs are going to be in the future. Investing can be expensive, and often many costs of investment are hidden from the typical investor.
Indeed, the average investor pays 1.17% of assets under management in advisory fees (according to a 2019 study by RIA in a Box), plus an average of 0.50% for equity mutual fund expense ratios (according to an Investment Company Institute study in 2020), meaning a total of 1.67% for a stock fund. None of this takes into account other types of fees often charged to investors such as transaction costs, sales fees, and spread costs.
Lowering fees to significantly below average therefore implies higher returns, and more money in your pocket. That’s not rocket science. But just how much of an impact this can have is stunning. In the example below, we compare the impact of a hypothetical 1.5% in costs to, say, half of that (0.75% in costs). In the simplified example, we show a $296,204 difference in portfolio value from an initial investment of $1 million, invested over ten years (from 12/2011 to 12/2021) in an S&P 500 fund:

When we build you a portfolio we target portfolio allocations which are consistent with your desired long-term return and level of risk.  This involves allocating different percentages of your portfolio to different types of investments; for example, a particular percentage to high quality bonds, another percentage to U.S. stocks, another percentage to foreign stocks, and so on.  If we have done our job right, those percentage allocations represent the optimal allocations for achieving your financial goals.
But over time, as some investments may increase or decrease in value, the mix of investment allocations in your portfolio will change. It is important to systematically rebalance the portfolio back to its optimal allocations at periodic intervals. Not only does this ensure that your portfolio will continue to reflect the best path to achieving your financial goals, but it also has been shown to actually increase the return of the portfolio relative to risk compared to portfolios which are not systematically rebalanced. It is a complicated process, which often involves other issues (such as the realization of unwanted capital gains), so it needs to be done carefully.

When you realize a gain on the sale of an investment, or receive an interest or dividend payment, it is normally taxed, and the taxes you pay reduce your net after-tax return.  However, in order to encourage certain economic activities, the government does not tax, or gives favorable tax treatment to certain types of investments or accounts, such as municipal bonds or many retirement savings accounts.  This creates opportunities for increasing your net after-tax return by taking advantage of these favorable tax treatments.

The tax code is a labyrinth of complex and often confusing regulations, so once again, it is not an easy process to effectively optimize the tax efficiency of investment accounts.  It often involves the deferral of capital gains, the harvesting of tax losses, the use of tax-exempt or tax-deferred investments, the allocation of different types of investments to different types of accounts to maximize the tax advantages, and so on.  At Plum Street Advisors, we will guide you through this complexity, because doing so will likely increase your after-tax return.