To create a large investment portfolio, you need to save money regularly, invest consistently, and learn to stay the course for as many years as it takes. There are, however, several strategies that can help you improve your investment gains over time. This post highlights a few of those strategies.
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Improve Your Investment Returns with These 7 Strategies
1. Find Lower Cost Ways to Invest
It’s easy to ignore investment expenses during bull markets - especially if you’re making money. However, the impact of those expenses can really add up over time, and not in a good way.
In fact, lowering your expenses by just 1% can make a huge difference in the performance of your investment portfolio over the long term. Let’s say that you’re earning an average of 10% per year on your portfolio, but paying 2% in investment fees of all types. That will leave you with a net rate of return of 8%. If your portfolio is $100,000, it will grow to $466,097 after 20 years.
If you can cut your annual investment expense in half - to just 1%, your effective net return will rise to 9%. If your portfolio is $100,000, after 20 years it will grow to $560,440. That’s a difference of roughly $94,000, and it is earned simply by cutting your investment expenses by 1%. Investment expenses DO matter!
To find the lowest fees possible, look for an online broker that has either a low- or no-annual-fee, and lower transaction costs. Favor funds over individual securities (since you won’t trade them as frequently), and choose no-load funds wherever possible.
2. Get Serious About Diversifying Your Portfolio
Most of us know about the importance of diversification. But, just as is the case with investment expenses, the concept can easily get lost during a bull market. After all, if your stock allocation becomes disproportionately large in a rising market, it will actually help your portfolio performance at least for as long as the bull market lasts.
But that’s the problem bull markets never last. The August mini-crash should be a wake-up call to anyone who has been ignoring proper diversification over the past few years. Markets fall much more quickly than they rise, which means that advance preparation is completely necessary. And that is what diversification is all about preparing for changing circumstances.
No matter how well your stock allocation is doing, be sure to maintain appropriate percentages of your portfolio in both fixed income investments and cash equivalents. They will help to reduce the losses you’ll experience on your stock allocation in a down market. Remember, minimizing losses during a bear market is just as important as maximizing your gains in a bull market.
3. Rebalance Regularly
Rebalancing is all about returning your portfolio to its original level of diversification. If you originally planned to have 60% of your portfolio invested in stocks, 30% in bonds, and 10% cash, it will be time to rebalance if your stock allocation has grown significantly higher than 60%.
The same is true in a bear market. If your stock allocation has fallen to 40% due to the declining market, you should rebalance to increase that position. It will enable you to take advantage of gains when the market recovers.
4. Take Advantage of Tax-Efficient Investing
Like investment expenses, income taxes on your investment earnings have a substantial impact on the performance of your portfolio. While it’s not usually possible to make them go away completely (unless of course you are investing in a tax-sheltered plan, like an IRA), it’s very possible and absolutely necessary to minimize investment taxes wherever possible.
One of the best ways to do this is to avoid heavy trading. Trading generates capital gains, and capital gains result in capital gains taxes. Those taxes - along with all of the trading fees involved can result in a portfolio that doesn’t perform materially better than a buy-and-hold model that’s invested primarily in funds.
And speaking of funds, you should favor index-based exchange-traded funds (ETFs). Since such funds are tied to the underlying index, they only trade stocks when the index changes. That means that they trade stocks far less than actively managed mutual funds. That minimizes your capital gains, which ultimately minimizes capital gains taxes.
5. Tune-Out the Experts
Have you ever heard an expert confidently predict that the Dow is going to 25,000 - or crashing down to 5,000? Ignore them. Experts who make claims like that are nothing but crystal ball gazers. They have no more insight as to where the market is heading than you or anyone else, but they sure think they do.
But, that doesn’t mean that they’re harmless. Since they deal primarily in hyperbole, they can get your attention easily. After all, no one ever wants to get caught napping while big things are happening. And if a self-styled expert can cast himself as credible, you may just decide that he’s someone who knows what’s really going on.
If you want to be a successful investor, particularly on a long-term basis, you’ll have to learn how to tune out this kind of chatter. All it does is distract you from your own investment goals and strategies, and that won’t help you in the long run.
6. Continue Investing in Your Portfolio No Matter What the Market is Doing
A portfolio that is growing through a combination of investment gains and regular contributions can grow dramatically. You should never allow the direction of the market to affect your contributions but sometimes that’s exactly what happens.
Both bull markets and bear markets can cause you to be hesitant to continue contributing to your portfolio:
- During bull markets, strong investment returns can easily convince you that continued contributions are no longer necessary.
- During bear markets, you may become convinced that contributing to your investment portfolio is an exercise in throwing good money after bad.
Both assumptions are completely counter-productive. Contributing to your portfolio during a bull market will not only cause your portfolio to grow faster, but will also provide you with fresh capital for more investments.
Continuing to contribute to your portfolio during a bear market is even more important. If your portfolio is falling in value due to negative returns, your contributions will be the only factor that minimizes the decline. Even more important, the new cash that you put into your portfolio will represent capital to buy stocks at deep discounts when the market is at the bottom, and finally begins to move in an upward direction.
7. Think Long-term
Probably the worst delusion that can affect any investor is the get rich quick mentality. It’s especially hard to resist during bull markets. Everywhere you look, there are experts promising that you can double or triple your money in just one or two years by following their plan. It’s utter nonsense!
Like paying off a mortgage, building a career, or raising a child, successful investing requires both time and patience. You should never measure your time horizon in months, or even years but rather in decades. By investing $10,000 per year in an index fund with an average rate of return of 8% over 30 years you will accumulate nearly $1.25 million. That may not be get-rich-quick, but it is a way to get rich - and that’s what really counts.
Making Your Investment Strategy Work for You
You’ll have to adopt a long-term view, and maintain the discipline to contribute to your savings plan each and every year, and to not allow yourself to get sidetracked by various get-rich-quick schemes along the way.
If you are already doing that, then you are on the right path. But you might have to use some of the strategies above to tweak your investment returns to higher levels.
Do you use any of these strategies now, or have you found that they kind of go by the wayside as the years pass?