[Editor's Note: This post was originally published as one of my monthly columns in MDMagazine. It is a quick look at some easy ways to have higher investment returns than you may currently be enjoying. Little of it should be news for the advanced readers, but the lessons are timeless and incredibly useful if you're a rookie investor.]
Most investors, physician or otherwise, need relatively high investment returns in order to achieve their financial goals. However, many experts feel the returns of bonds, stocks, and even real estate are likely to be lower in the foreseeable future than they have been historically. Bond yields, in particular, are at 30-year lows. The stock market is nearly seven years into a bull market […nearly 10 years into that bull market now. – Ed] and good deals in real estate are becoming harder and harder to find as the economy recovers. Higher returns are often correlated with higher risk when it comes to investing, but there are several ways to boost your investing returns without increasing risk in the short or long term.
4 Ways to Boost Your Return on Investments Without Increasing Risk
#1 Achieve Market Returns
Despite decades of academic literature suggesting the need to change strategies, many investors are still unknowingly engaged in a vain pursuit to beat the market over the long run by selecting individual securities and engaging in market timing, or more commonly, hiring a mutual fund manager or financial advisor to engage in these same deleterious behaviors. Investors in the know, on the contrary, have realized that these behaviors are far more likely to result in underperforming the market than in beating it. The sophisticated solution is also the simple solution—guarantee yourself market returns by investing in low-cost index funds. It turns out that it is quite difficult to beat the market after the expense of trying to do so, but it is very easy and inexpensive to match market performance. Low-cost index funds, available through many companies such as Vanguard, Fidelity, Charles Schwab, and the Federal TSP, are available in many asset classes including stocks, bonds, and real estate of all flavors. Eliminating the likelihood of underperformance boosts your expected return while simultaneously reducing your investment-related risks and costs.

A well-deserved rest in the Tetons
#2 Decrease Fees
Another guaranteed way to boost your investing returns is to lower your investing-related fees. These include advisory fees, commissions, spreads, expense ratios, and wrap fees. It is not uncommon to see investors paying 2% or even 3% in total fees every year. Even if an investor managed a return of 8% a year before fees, if he is paying 3% a year in fees, he will end up with 43% less money (and retirement income) after 30 years. While most investors cannot reduce their fees by 3% a year, many investors who start paying attention to their fees are able to reduce them by 1% a year or more. Every dollar paid in investment expenses comes directly from your investment returns. Reduce the “drag” and your nest egg will grow much faster. Some easy ways to reduce fees include eliminating “churn” by engaging in fewer transactions and using the mutual funds in your 401(k) with your lowest expense ratio. Many investors can also lower advisory fees by negotiating with their current advisor, moving to a lower cost advisor, or even learning to manage their own portfolio. While individual investors often lack the knowledge of a professional, sophisticated investment management can be surprisingly simple, and if nothing else, the investor can rest assured that he won’t rip himself off!
#3 Decrease Taxes
One of the largest expenses for many investors is the taxes due on interest, dividends, and capital gains generated by investments. By investing in a tax-efficient manner, this expense can also usually be reduced significantly. This can be done by maximizing the use of retirement accounts such as 401(k)s and Roth IRAs. Using tax-efficient investments, such as index funds and municipal bonds in non-qualified (taxable) accounts also reduces the tax bill. Holding investments with capital gains for at least one year allows those gains to be taxed at the lower rate reserved for long-term gains. Tax loss harvesting any investments with capital losses can further reduce the tax bill. After applying the effects of investment expenses, taxes, and inflation, many investors don’t have any return at all. There isn’t much you can do about inflation (aside from taking sufficient investing risk that you can outpace it) but an investor can exert a surprising amount of control over his fees and taxes.
#4 Diversify in High-Returning Asset Classes
Another way to boost investing returns without taking on any additional risk is to diversify into other high-returning asset classes. For example, instead of simply investing in US stocks, an investor could add an investment in international stocks and one in real estate to his portfolio. Since each of these investments has similar, high returns over the long run, but varying returns over the short run, holding a fixed percentage of each of these assets and periodically rebalancing them reduces portfolio volatility, reducing risk and increasing returns. The lower the correlation between the returns of the various asset classes, the more effect this diversification will have. Bear in mind that diversifying into some lower-returning asset classes, such as bonds and precious metals, may reduce risk, but is also likely to reduce long-term portfolio returns.
Very few investors have the luxury of only needing low returns to meet their goals. Achieving acceptable returns in our current low-yield environment can be made much easier by achieving market returns, reducing investment expenses, decreasing taxes, and diversifying the portfolio. The sooner you take these steps with your portfolio, the larger your nest egg will become, allowing you more money in retirement, more time in retirement, or both.
Beautiful article. Simple strategies. These are common sense, yet not so common among investors…
There is nothing new here for WCI readers or for Bogleheads but most Americans desperately need to follow all of those. I am tempted to add value or small company tilt but that may not turn out to increase returns in the future as it has in the past. Also there actually may be more risk when tilting.
Remember the audience for these posts written for other publications is dramatically less financially savvy than long time readers of this blog or the Bogleheads forum.
This is probably going to sound critical, but it really is a serious question. Do you get tired of writing essentially the same material over and over again?
I get that this is good and important advice and it’s for other readers (i.e., not your blog readers), I’m just wondering if after a while you just get tired of it.
No more tired than I get taking care of chest pain patients over and over again. 🙂
If there was something new in personal finance three times a week for decades none of us would ever be able to get what we need.
I guess there’s something different about the repetition when each episode is a unique interaction with a new individual. At least that’s the way it is for me. And in medicine there is always new stuff. Certainly not 3x/week, but I’m sure practice 10 years from now will be different in many ways, from what you do now. The advice in your article probably never will.
I once asked Rick Ferri a similar question about why he keeps writing essentially the same columns and books. He said it’s because Wall Street keeps telling the same lies. It’s really true. You know, costs don’t matter, active management works, everyone should buy whole life etc etc.
50 yerts mnow since med school. I did not follow the code of steadily increasing net worth.. but i have had a wonderful experience so far.
If I had not had a prolonged difficult disease most of which was afterage 65, i would not regret anything. One cannot begin to live on social security. I really do with i had started age 16 and put away safely 10%. safely does not include whole life insurance policies nor anything a broker will suggest..
Sorry to hear about your illness. Thank you for sharing your experience as it is very valuable for those younger than you.
I think this is the kind of message that needs repeating over and over again. And the fact that you have additional outlets to do so is really a good thing.
I have my own financial planning practice and yesterday I must have told someone for 100th time that they shouldn’t take social security benefits at age 62. (Although unlike 90%+ of those clients, I don’t think this couple is going to listen to me…)
Isnt that one of the best attributes of doctors, you end up saying the exact same things over and over and over yet try to keep it genuine and personalized. All the while not appearing as if you cant believe you have to say this again.
It may be your 10 millionth time often its one of the first times for the listener.
Teaching one doctor at a time
Costs matter and cost investors hundreds of thousands over 40 yrs and most do not realize that loss
Keep up the good work
The more it’s promulgated, more will get on board
I got it pronto reading random walk down wall st
Thank you burton malkiel and John bogle for teaching me the ropes
About rebalancing, it makes sense. For years, I wondered why a commonly suggested portfolio was 60% stocks and 40% bonds. Recently, I found out. Such a portfolio, when rebalanced, gives returns similar to a 100% stock portfolio but with considerably less volatility. So for an institutional investor, such as a university endowment, such a portfolio makes great sense. Such investors are taking 5% out of their portfolios every year. And volatile returns, which could make that 5% volatile, are a major issue.
However, the vast majority of those who read this blog are in a different situation. For a taxable investor, rebalancing is probably a bad idea. Rebalancing with your savings or income from your portfolio is fine. But selling securities in order to rebalance is a bad idea. After taxation, it’s not worth it.
Also, the pretirement investors who read this blog don’t need a steady income from their retirement portfolio. For them, rebalancing between stocks and bonds may hurt them, rather than help them.
So yes, rebalancing can be a good idea. But the operative word is can, not is. A blanket endorsement of rebalancing is a bad idea IMO.
60/40 underperforms 100% stock historically by a significant margin.
Rebalancing is more about risk control than boosting returns.
About a rebalanced 60:40 giving similar returns to 100, the source of that is Paul Merriman.
Similar to is not equal to. For example, returns of the S&P 500 over the last 10 years are 6.9%. Returns of the Coffeehouse portfolio are 5.47%. Over 30 years, a 1.5% difference in returns is huge.
No free lunch there. You get less volatility, and less deep risk, but you do so at the cost of lower expected returns over the long run. That trade off may very well be worth it for many individuals and institutions, but to pretend it doesn’t exist is folly. Run the numbers yourself and you’ll see.
“most people can meet their long-term goals if they invest 60 percent of their money for growth – that means stock funds – and 40 percent for income, which means bond funds. The 60 percent gives your money plenty of power to take advantage of the good times in the stock market – historically about two of every three years. And the 40 percent will help smooth out the bumps along the way, making it much easier for you to stay the course. Here’s the evidence: From 1951 through 2011, this strategy produced a higher return than the Standard & Poor’s 500 Index – at about one-half the risk.”
http://paulmerriman.com/2014-new-site/wp-content/uploads/2013/04/first-time-investor-grow-and-protect-your-money1.pdf
Actually, the link I gave is wrong. But the quote is right, and it’s from Paul Merriman. It surprised me, and if someone can show that PM’s wrong, please do.
First of all, I really like Paul Merriman. I think he’s great and gives great advice. You are unlikely to go wrong following it. The point we’re arguing about is a very minor one that even experienced investors mistake.
According to Google, the quote you give is from Merriman’s 2012 114-page book First Time Investor:
http://paulmerriman.com/2014-new-site/wp-content/uploads/2013/04/first-time-investor-grow-and-protect-your-money1.pdf
However, I would counter it with what he wrote on page 11:
When there are decades left before you will need the money you
invest, you want that money to grow. No one can guarantee the
return you will achieve from investing in stocks (using mutual
funds, of course). However, there is little evidence that you will
achieve any significant growth if your money is in bonds or
certificates of deposit.
It’s true that you can reduce your short-term risks by adding cash
and bonds to your portfolio. But if you do that, you’ll reduce your
long-term return in order to gain some short-term comfort. If
you’re young, that’s a poor bargain.
Over the 86 years from 1926 through 2011, long-term government
bonds provided a return of 5.7 percent. Meanwhile, the Standard &
Poor’s 500 Index returned 9.8 percent. That difference is much
greater than it seems.
Sorry, can’t have it both ways. No free lunch. You can have less volatility or you can have higher returns, but not both over the long term.
Check out the chart on page 21 as well. My point will be clear.
I have to agree with bits and pieces of information presented above regarded asset allocation percentages:
1. First off, you have to select an allocation of equity/fixed income that you can live with/sleep at night. We are all different in this regard.
2. True, a 100% equity asset allocation will outperform fixed income over an extended period of time.
3. As one nears retirement, one must create a “paycheck” by way of their portfolios. This means having a larger portion of their portfolio in fixed income, arguably 40-50% allocation. This allocation will provide monthly dividends to be funneled into “paycheck” account. This fixed income allocation will also provide stability to overall portfolio when we have a equity correction-bear market which we will eventually see.
4. Once near or in retirement phase, or creating a “paycheck” phase of portfolio management, rebalancing has different implications. While working and living off W2 money, rebalancing is fine. But once in retirement phase, rebalancing obviously can create hiccup in your monthly income if planning on spending monthly dividends from fixed income allocation, if you rebalanced from fixed income into equity.
“Paychecks” can also be created by selling share and “declaring your own dividend.”
Yale U’s UNCONVENTIONAL PORTFOLio
SWENSENS LAZY MANS PORTFOLIO
WORTH A LOOK!!!!