It may seem like investors today are faced with never-before-seen challenges and complexity. Technology is ever evolving, more people are investing than ever before, and markets keep expanding to include ever more participants from new industries, nations, and so on.
But the reality is, many investing fundamentals remain unchanged. And the reasons many investors fail to meet their goals aren't because they can't keep up with the latest tactics and techniques, but because they generally fall prey to the same mistakes—repeatedly.
Common mistakes can add up. Ultimately they diminish the value of your portfolio. If you can learn what the most common mistakes are and how to avoid them, you can begin reducing your error rate and improving your overall success.
To learn more about the eight most common mistakes investors make, and how you can avoid them, click here.
A fairly common mistake many investors make, particularly those planning for retirement, is confusing income needs with cash flow needs. Income and cash flow are not the same thing.
Put simply, cash flow is how much money you need for living expenses and other personal uses of cash. Income, however, is the amount of dividends and interest a portfolio earns that, in the case of a taxable account, you will pay current income taxes on.
It's a crucial difference, because the way you generate income can have a tangible effect on your portfolio growth, as well as on the taxes you pay, both of which impact your ability to get cash flows to cover your living expenses.
It's a mistake for investors to think they should get the cash flow they need solely from income and never sell stocks or touch principal. This is an emotional bias that for many simply cannot be overcome, but can impact overall performance. Instead, investors should focus on total after-tax return.
For example, selling stock to meet income needs can allow you to stay fully invested and create “homegrown” dividends by selling selected securities. When compared with some dividends, as well as with interest from fixed income, selling stock may offer tax advantages because the transaction might be taxed at the lower long-term capital gains rate rather than at your marginal rate. And, harvesting losses can also lower overall tax liability.
The chart below shows how large the potential after-tax difference could be when cash is generated from interest income compared to selling stock with long-term capital gains.
To learn more about the eight most common mistakes investors make and how you can avoid them, click here.
* Actual results will vary. The differences between interest income and long-term capital gains tax rates depends on individual circumstances. No assurances can be made regarding gains. Investing in securities involves the risk of loss.
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