While investors know exactly what they're getting upfront, unit trusts also come with a big tax advantage over mutual funds. You're responsible only for the capital gains you earn -- you'll never be faced with paying a capital-gains tax on somebody else's money, as often happens with mutual funds.
Most UITs have good liquidity, and can be traded daily at or near net asset value. They can be found at most of the major fund companies or through a brokerage.
Managed subaccount with a registered investment adviser
Putting at least a fair portion of your liquid net worth into the hands of a trusted investment professional is the single best choice for many people. There are enough professional certifications within the world of investing to make anybody's head spin, but a good registered investment advisory company should employ either chartered financial analysts or certified financial planners.
Registered investment advisers earn fees (typically as a percentage of assets) for the service of creating and maintaining portfolios custom-suited to individual investors. They are registered with the Securities and Exchange Commission, and must adhere to strict reporting and presentation standards to ensure fairness to investors.
The minimum investment required to get started used to be quite high, but RIAs are no longer just for the high-net-worth group. Thanks to cost savings from electronic trading and other market efficiencies, RIAs can take on new clients with as little as $100,000, in some cases.
This option provides great tax advantages, in that a professional with knowledge of your tax situation can manage your gains and losses for the year. Also, it's nice to have your portfolio managed by a seasoned pro -- someone who can guide financial events that will shape your life in the coming decades.
Fees vary, but this competitive field can be accessed for about 1% per year, roughly the same as a mutual fund.
Life-cycle funds are meant to change over time, becoming more risk-averse as an investor ages. Almost all life-cycle funds specify a target date in their titles; you'll want to read the fund's prospectus to verify the significance of that date.
For example, the Vanguard Target Retirement 2025 (VTTVX) fund structures its asset allocation for investors who will hit retirement age from 2023 to 2027.
Life-cycle funds are a solid choice for investors who want to buy a savings instrument and hold it for many years. On Day 1, the fund will likely have its highest risk level; over time, it will increasingly focus on income generation and capital appreciation by increasing its reliance on fixed-income assets while scaling back exposure to stocks.
Many life-cycle funds can be purchased with no sales loads, and many offer competitively low expense ratios. Some funds will hold sets of other mutual funds or ETFs, while others have individual securities selected by a fund manager.
Dividend-reinvestment plans (known as DRIPs) allow investors to have their quarterly dividend checks automatically reinvested into a single dividend-paying company. Hundreds of companies offer these plans, including most of the Dow Jones Industrial Average ($INDU).
DRIP programs may also be offered by a third party, such as a broker or a transfer agent. The main advantages of DRIPs are:
- The ability to automatically dollar-cost-average into a stock.
- Savings on stock commissions. In most cases there are no trading fees.
- The option to purchase fractional shares and buy shares at below-market prices.
- The ability to get started for as little as $10 and add money over time.
DRIP plans need to be balanced with other investments, as they don't do much to diversify a portfolio. But they are generally a cheap way to get increasing exposure to top-notch companies -- the kinds that have historically provided the best returns to investors.
The purchase of a second property or rental property or a move into a smaller, more efficient home following the sale of a primary dwelling can provide asset diversification, tax savings or a place to spend some extended vacation time.
Real-estate decisions are not to be taken lightly, and most investors should strongly consider consulting advisers before pulling the trigger on any transaction. Your whole financial picture should be considered, including your net-worth diversification, your liquidity needs and your personal tax situation.
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