The recent trend has been for investors to become enamored with the latest "hot" investment option. I believe that rather than spending significant energy looking for the next hot stock or the next great investment region of the world that instead investors should focus on the factors that will likely lead to the real accumulation of wealth. Those factors are a focus on the investment return after taxes, inflation and investment expenses.
A brief example will highlight the factors that reduce an investor's real return. Many investors flocked to CDs during the stock market's decline in March of 2009. I understand their concern for safety after watching the stock market plummet 50% from its highs. However, an investor should consider the impact on real return (after taxes, inflation and expenses) of such a move. Assume that an investor with a marginal income tax rate of approximately 30% moves $100,000 into a CD earning 3%. Therefore, the investor expects to earn $3,000 of interest income and will be required to pay $900 ($3,000 x 30%) in income tax resulting in a real return of $2,100 after one year.
Now let's assume that instead of purchasing the CD that the investor places the $100,000 into several blue-chip stocks with an average dividend yield of 3%. Unlike interest income that is taxed at ordinary income tax rates, dividends are taxed at the reduced capital gains tax rate that does not exceed 15%. In this example, instead of paying $900 of income tax the tax bite is only $450 (15% x $3,000). The investor also has the opportunity to participate in the market appreciation of the stocks purchased which has been significant since March 2009 (currently the S&P 500 is up over 50% from the March 2009 lows).
I am not suggesting that everyone purchase dividend yielding stocks instead of CDs. I am suggesting that investors will be employ different strategies if they properly consider their real return after taxes, expenses and the impact of inflation.
There is always a trendy trading strategy that will attract attention. However, most are just fads that will pass with time and be replaced with the next great investment gimmick. There are an infinite number of ways to reduce taxes, expenses and the impact of inflation which can all improve an investor's real return. I believe that we should focus on the real and not the fad in order to generate real financial security.