Yesterday we proposed three investment resolutions for a richer 2017. Today, we present four more ways to grow your wealth next year.
1. Get to know your financial advisor better (if you have one at all!)
If you use an investment or financial advisor (and – just to be clear – I firmly believe that most people can take care of their own finances and do not need a financial advisor… in fact, that’s one of the reasons I founded Truewealth Publishing), make an appointment with him or her in the new year to ask a few questions – especially about how they get paid, if you don’t already know.
Are they purely commission-based salespeople? Do they charge an annual percentage based on the value of the assets they manage? Is it a flat annual fee?
Then ask about how much you paid in fees over the past year. Was the advice you received worth it? If you feel your advisor has earned the fees, great. If not, take stock of the relationship.
Also find out if they’re governed by suitability or fiduciary rules. It can have an impact on the quality of advice and the fees you’re paying. You can read more about the difference between suitability and fiduciary rules here
2. Decide what to do with your winners and losers
As we noted here, global markets have had a good year, and most major stock markets are up. That means you might have some investments that have done well.
It’s too late now to sell any losers for tax purposes (some countries allow you to offset investment gains with investment losses for tax purposes – after you sell the security). But you could take some money out of the market – by selling either winners or losers – to raise some cash.
It’s a good time to see if you should sell some of your winners, or trim them, if you are sitting on big gains… or if they’ve hit your target price… or if the fundamentals of the company have changed and the big gains are done. This will lock in any profits and free up some cash to look for the next opportunities.
And if some of your investments have lost you money and the prospects look dim, it may be time to sell them and move on. This will help you avoid losing money to opportunity cost. It could help you avoid the return-killing demon of the value trap. It will also mean cash on hand to take advantage of more promising long-term opportunities.
3. Purge dangerous ETFs
Rid your portfolio of leveraged and inverse ETFs, which are the financial world’s version of weapons of mass destruction.
Leveraged ETFs attempt to track 2 or 3 times the performance of an index. For example, SSO (the New York Stock Exchange-traded Ultra S&P 500 ETF) says that it aims to return 2X the S&P 500 Index. So if the S&P 500 Index rises 1 percent in a day, SSO returns 2 percent. (And if the S&P 500 falls 1 percent, SSO falls 2 percent.)
Inverse ETFs do the opposite of what an index does – if the S&P 500 falls 1 percent, SH (the Short S&P 500 ETF) rises 1 percent (and if the S&P 500 rises 1 percent, SH falls 1 percent).
Both inverse and leveraged ETFs use derivatives to do this. Derivatives are instruments that “derive” their value from an underlying asset. For instance, you can buy a derivative that will be valued based on how the price of gold or a stock index performs.
The problem with these types of ETFs is that they don’t always work like they’re expected to.
Here’s an example to illustrate: Let’s say you buy a 2X leveraged ETF that tracks the return of ABC index. You buy 1 share of the ETF for $100, and the underlying index is at 10,000.
If ABC jumps 10 percent the next day to 11,000, your 2X leveraged ETF would increase 20 percent, to $120. But say the next day the index drops from 11,000 back down to 10,000. That’s a 9.09 percent decline for the index. But your 2X leveraged ETF would go down twice this amount, or 18.18 percent.
Losing 18.18 percent means the value of the leveraged ETF would drop from $120 to $98.18. So, over the two-day period the underlying ABC index is unchanged – it started at 10,000 and is back at 10,000. But the value of your 2X ETF is down 1.82 percent!
Now, if the underlying index rises every single day for an extended period, you will earn great returns. But any down days will hurt a leveraged ETFs performance (relative to the underlying index) by more than you’d expect.
That’s one reason why it’s best to avoid these types of ETFs. You could get the trend right… and lose money anyway.
4. Don’t put too much faith in real estate
Buy, hold and get rich has been a mantra for real estate investors for years. But as shown below, the U.S. and Hong Kong stock markets win hands down when compared to real estate prices over time. It’s only in Singapore where owning a house instead of stocks has made more money over the long term – and that’s partly because share price performance has been so poor.
Plus, real estate prices in many markets are in bubble territory. This is partly because interests rates, and in turn mortgage rates, are close to all-time lows. Cheap financing means buyers can afford more house, and this helps drive prices higher. (This dynamic will be changing if the U.S. Federal Reserve continues to raise interest rates, though.)
As I mentioned above, if you’re sitting on big gains in your real estate portfolio it may be time to trim. Like any other asset, real estate prices will not go up forever. Lock in profits now and keep the cash. And don’t sacrifice potential stock market gains at the altar of real estate investing.
One more way to grow your wealth
Besides all of the above, make sure to look into our new research product, the Asia Alpha Advisory. In it, we present our very best investment ideas on a subscription basis. You can learn more about it by clicking here.