What Is Efficient Investing?
Efficient investing is a strategy that aims to maximize returns by minimizing costs and taxes. This happens through shrewd asset allocation, tax-efficient investing, and continual rebalancing to ensure your portfolio reflects your investing profile.
Using proven investment tools and techniques, EP Wealth financial planning professionals work with the intention to reduce unsystematic risk and move you closer to your financial milestones, all on your timeline.
Goals of Efficient Investing
These objectives are the foundation of efficient investing.
- Asset allocation: Asset allocation refers to how you divide your portfolio among various types of assets, each with its own risks and return potential. Efficient investing balances risk and reward to potentially achieve short- and long-term results based on your unique financial objectives.
- Diversification: It’s equally important to choose the right mix of short-term investments to limit exposure to a single type of asset, which may underperform. Although diversification cannot entirely protect against loss, it may help to reduce the impact of volatility on your portfolio.
- Cost minimization: Brokerage fees, transaction fees, and other costs add up over time, potentially chipping away at your long-term growth. Among other strategies, our advisors work towards mitigating that drag on returns by exploring cost-effective investment vehicles, consolidating assets to lower fees, and requesting fee reductions with providers.
- Tax efficiency: Lowering tax drag on your returns requires a multifaceted approach. One way to reduce taxes is to utilize 401(k)s, traditional IRAs, Roth IRAs, and other tax-advantaged accounts. Using vehicles that generate fewer taxes also helps lower taxes in the long term. To lower your income and annual tax bill, consider placing some income into a health savings account (HSA) for future tax-free medical withdrawals.
- Regular rebalancing: As the market shifts, your investment portfolio needs to be repositioned to respond to those changes. We closely monitor asset performance and adjust your portfolio accordingly, selling and buying assets to bring you back closer to your target asset allocation.
Everyday Strategies for Efficient Investing
Modern Portfolio Theory
Modern Portfolio Theory (MPT) is another investment principle that assumes investors are generally risk-averse. The investor will always choose the less risky portfolio when given the choice. Using this premise, financial advisors build a portfolio that manages return for that level of risk.
Efficient Market Hypothesis
More conservative investors may also benefit from the Efficient Market Hypothesis (EMH). EMH suggests that stocks always trade at their fair market value, and opportunities to outperform the stock market are limited. If you agree, you can prioritize passive investment options like index and exchange-traded funds that reflect your comfort level.
Tax-Efficient Investing
While taxes shouldn’t drive your investment choices, thoughtful decisions about the asset classes you select and the types of accounts you hold them in will impact your tax bill. Placing investments in the most tax-advantaged accounts is the one strategy to help with lowering your tax obligation.
Losses from low-performing investments with tax-loss harvesting may potentially offset capital gains taxes and reduce taxes.
Investing is like a puzzle; all the pieces must fit together to achieve the desired result. For investors, that means achieving market returns with minimal cost and effort. Advisors at EP Wealth consider every piece of your investing puzzle to build a portfolio that aligns with your risk tolerance and time horizon.
Connect with an advisor near you to learn more about EP Wealth investment management services and start building a brighter financial future today.
