Every investor’s goal is to maximize the value of their portfolio in the shortest time period with the least amount of risk. Strategic planning as you develop and grow your investments is critical to maximizing your returns. Your aim should be to balance a reasonable degree of risk with sound investment decisions, and consistent contributions over time.
Determining the actions to take in order to maximize your profits can be a challenging prospect. Below are six proven strategies to maximize returns on your investments.
1. Adopt a long term view
Rome wasn’t built in a day. And neither will your portfolio. The daily news is plagued with warnings of a bear market just around the corner. Your well-meaning neighbor is continually telling you it’s time to pull out of the bond market and now is the absolute best time to invest in gold.
The worst thing you can do is fall prey to the rumors and buy into the latest investment fads. Stay the course. Develop an investment strategy and stick to it. Continue to contribute to your portfolio, particularly during a bear market.
Positive returns take time, patience, and perseverance. Because most get-rich-quick schemes are guaranteed failures.
2. Lower your cost of investment
Investment expenses add up quickly. Fees are often overlooked because they aren’t discretely paid in the form of an invoice. They also look small, expressly defined as 1% or 2%. However, against a large (or small) portfolio they directly impact the rate of return on your investment.
For example, if you’re earning an average 9% return per year on your investments but paying 2% in expenses, you’ve cut your return down to 7%. A 2018 Consumer Reports survey noted 46% of investors were unaware of how much they paid in expenses.
Do some homework and review your statements. Then, talk with your broker to identify how much your spending on expenses. Look for costs identified as a management fee, sales charges, and maintenance fees.
If you don’t like what you see, consider moving to an online broker. An online broker typically charges a flat fee per trade. Alternatively, look into investing in a low-cost mutual fund through Vanguard.
Similarly, taxes are another hidden cost to investments. Consult with a tax attorney or CPA to ensure your investment strategy includes minimizing your tax exposure.
3. Asset Allocation
Investing in a variety of asset categories that perform differently across market conditions can protect your portfolio from extreme losses. Asset allocation is one of the most important decisions you’ll make for your portfolio.
The three main categories of investment choices are stocks, bonds, and cash. Consider these to be the foundation of your portfolio. There are, of course, other categories to be considered such as real estate, precious metals such as gold and silver, and other commodities like wheat or oil.
Your specific asset allocation will depend on your risk tolerance and the length of time you have to cash in your investments.
For instance, if you’re early in your investing career, and tend to be more aggressive, you’ll lean more towards stocks that have a greater rate of return. However, the higher the reward, the greater the risk. Alternatively, if you’re close to your retirement years, you’ll want to carry lower risk and invest in less volatile instruments such as bonds.
The purpose of diversification is to balance risk with reward. We’ve all heard the saying, “don’t put all your eggs in one basket.” It’s the epitome of diversification.
Asset allocation is determining which category you invest in, however, diversification is how you spread your investments out amongst different categories as well as within those categories.
A properly diversified portfolio will lower the overall risk because some of your assets will be performing well and others will be taking on loss, dependent on how the market is performing at any specific point in time. Therefore your losses will be covered by your wins.
Proper diversification can be challenging. Therefore, you may want to consider investing in mutual funds. Many mutual funds are already diversified by spreading the underlying securities across thousands of companies and multiple assets, thereby doing all your work for you.
5. Rebalance regularly
Rebalancing your portfolio is the process of realigning the mix of your assets. As the market changes, your portfolio allocation will fluctuate based on which stocks are performing well. Regularly evaluate your asset allocation and rebalance accordingly.
Let’s say your chosen allocation is 50% stock and 50% bonds. Due to a declining market, your stock ratio has fallen to 30%. As such, you should navigate back to your original allocation by moving a portion of your contributions from bonds to stocks.
Rebalancing is also the act of getting rid of your bad apples. Consider selling investments that are no longer aligned with your goals or consistently underperforming for a period of time.
Aim to rebalance your portfolio at least once per year.
6. Remove emotion from your decisions
Similar to, and just as important as the first strategy, you’ll want to remain disciplined and remove emotions when you’re making decisions about your investment strategy. Particularly when you’re exposed to sudden and large swings in the market.
Imagine your portfolio is growing steadily over a few years and within a few weeks, the market crashes. Sadly, you lose half of your value. Avoid rushing into a quick decision to pull your investments out of the market. You’ll be cashing in when the value of your investments is at a lower value, and you’ll pay large fees.
Rather, stick to your guns. Rely on your research knowing that you’ve properly diversified your portfolio and some losses will be offset by big wins. This is also the perfect time to increase your contributions and buy while stocks are “on-sale”.
Do you utilize any of these investing strategies within your portfolio? Let us know in the comments below what you find to be the best strategy to maximize your investments.