3 things that could super-charge your investment returns over the long term: Scott Phillips

Most people would probably say they’d like to achieve the best investment returns they can to grow their wealth. In this article, we’re going to look at three of the most useful tips.

There are a number of different factors which impact how much wealth someone is able to build. How much someone earns from their job/business can play an important factor. How much they save and invest of that earned income is another factor. Generating good investment returns can also play its part.

Let me show you how much difference it can make.

Using a compound interest calculator, we’ll compare two scenarios over a 30-year time period, starting at $0 and investing $1,000. In one scenario we’ll look at the portfolio earning a return of 9% a year and the other will make 10% a year.

For the 10% figure, it grows to $1.97 million. For the 9% figure, it achieves $1.64 million. In other words, that 1% a year ended up being a lost opportunity cost of more than $300,000!

The Motley Fool’s Scott Phillips went on NABTrade’s podcast to discuss the sorts of things that people can do to accelerate their wealth and for their investments to be as effective as possible.

Utilise tax-efficient vehicles

Phillips acknowledged that it can be difficult to choose the right structure but that there is a whole industry of professionals who are experts at helping people identify what’s best for them.

He said the right structure can provide opportunities for people if they know what they’re doing.

Phillips pointed out that the tax effectiveness of superannuation is “through the roof”. He did say that some people may have money outside of super “and they probably should”, admitting some of his own investing is done outside of superannuation.

The 15% tax rate of superannuation during the accumulation phase and 0% at retirement (depending on individual circumstances) is “stupidly generous”. He proposed that the amount of tax saved could add more than good stock picking.

Phillips also noted that family trusts and companies could be beneficial, but said that’s for other experts who know more about that side of things to provide the detail. He said that being able to split income with a lower-tax partner could make a big difference.

Basically, he was pointing out that saving on tax could make a big difference to the end result of investment returns. However, Phillips said that investors shouldn’t make an investment just because of the tax implications. It’s the after-tax return that is the important number.

Even so, it’s worth thinking about at the beginning of an investment plan because it can make big difference over time.

Benefit from franking credits

The Motley Fool expert also brought up the tax imputation credits called franking credits. This is a refundable tax credit that is attached to dividends paid by Australian companies. It aims to ensure that company profits are not taxed twice before reaching shareholders’ bank accounts.

He noted that Australian companies that pay dividends enable investors to achieve stronger after-tax returns.

For investors with a low (or 0%) tax rate, franking credits boost the dividend return that investors receive, once they have completed their tax return.

Telstra Group Ltd (ASX: TLS) shares are an example of an investment that pays fully franked dividends.

Lower fees

Phillips also said that fees can play a big part in long-term returns. We often see ads comparing super funds showing how much higher fees can hurt a super balance over time. Phillips referenced a statistic that showed someone’s superannuation balance could be 30% to 40% higher if they choose the lower-cost fund option.

The investment expert also noted that online brokers have significantly brought down the cost of each transaction for investors. This is a “huge benefit”, he said.

Whatever their investment choices, if people trade too frequently it could mean “paying too much” in fees and losing some of their investment returns.

However, he pointed out that he isn’t anti-fees. If someone will earn a massive return for him, he’s happy to pay a bit more or even a lot more.

Phillips said “the after-fee returns are what we should care about…it makes sense to reduce those fees as much” as we physically can.

Foolish takeaway

By utilising these tips, investors may be able to boost their wealth quite significantly over the long term.

As I showed at the start of this article, the difference over time could amount to hundreds of thousands of dollars.

The post 3 things that could super-charge your investment returns over the long term: Scott Phillips appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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