Managing Your Fortune: Zipping up investment returns

- Alan Lavine and Gail Liberman

When the stock and bond markets are doing well, investment expenses have little impact on performance. But when the stock and bond markets sag, expenses and taxes have a bigger impact on returns.

If you purchase individual stocks or bonds:

• Stick with low-cost discount brokerage firms or use their web sites to invest. But check policies for reimbursing you in the event of theft. You can save a fortune on brokerage commissions, but you must be a do-it-yourself investor and feel secure. Also, don't assume that just because a brokerage firm is a "discount brokerage" that trades are low-cost. Compare prices.

• If you are buying U.S. Treasuries, corporate bonds or municipal bonds, shop around. The prices you pay for bonds can vary. Reason: Brokerage firms take cuts out of the bond price. You can check the price of bonds though the Bond Market Association's website www.investinginbonds.com. The site provides full corporate bond pricing information being made available through an agreement with the NASD. The information includes real-time transaction information for all retail trades, all investment grade trades and all but the least liquid trades of non-investment grade issues.

• Avoid brokerage commissions by getting a managed account. Depending on the amount you invest, money managers typically charge a 1 percent annual fee.

Get more mileage out of mutual funds by cutting taxes and investment expenses. For example:

• Consider keeping bonds that pay interest in your tax-deferred IRA or tax-free Roth IRA retirement savings accounts. If you have a 401(k) pension, do the same.

• Consider keeping stock funds that pay no or low dividends, such as index funds and small company growth stock funds, in your taxable account.

• Consider investing in tax-managed stock funds in your taxable account. Vanguard Group has among the lowest-cost tax-managed funds. These funds limit the amount of dividends and capital gains payouts.

• High-tax-bracket investors might consider tax-free municipal bonds.

• You also might evaluate whether to put dividend-paying stock in taxable accounts. The reason: Your stock dividends are taxed at just 15 percent due to the recent tax laws.

• Consider investing in U.S. EE savings bonds. You might also invest in inflation-indexed U.S. I bonds. The income increases with inflation. In both cases, you only pay taxes when the bonds mature.

• Avoid investing in mutual funds at year end. Reason: Funds at that time generally pay out capital gains. No matter how long you have owned a fund, you will owe the IRS your prorated share of the distributions.

• Stick with low-cost mutual funds. The average stock fund has an expense ratio of 1.4 percent. The average bond fund's expenses are 1 percent. Money market mutual fund expenses run about .5 percent.

• Take advantage of sales break points if you invest with a broker. You generally can reduce your commission if you have at least $50,000 to invest. Typically a $1 million investment is commission-free.

• Don't forget to write off the cost of investment publications on your taxes.Always keep tabs on the safe portion of your investments. Make certain you're getting the highest rates possible on CDs and savings accounts. You can check some of the nation's highest yields at www.bankrate.com. The highest-yield money market mutual funds are tracked at www.imoneynet.com. But beware. Although money fund rates may rise faster than those on bank CDs, money market mutual funds are not FDIC-insured.

By contrast, FDIC insurance does not cover your bank account for fraud or theft--only a bank failure. So always evaluate security measures and policies for reimbursement in the event of a theft--regardless of whether you select a bank or money market mutual fund.

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Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).