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 and adjustments are crucial to optimizing your returns as you develop your portfolio and grow your investments. You should aim to balance a reasonable degree of risk with sound investment decisions and consistent contributions over time.
However, figuring out how to do this and which actions will maximize your profits can be a challenging prospect. Below are seven proven strategies to maximize returns on your investments.
7 Ways of Optimizing Returns on Investments
1. Adopt a long-term view.
Rome wasn’t built in a day. And neither is a well-rounded portfolio. It’s best to avoid warnings from the daily news of a bear market just around the corner. You should also ignore advice from your well-meaning neighbor who jumps into the latest trends.
Even if there is a dip in the market, don’t get yourself worked up over online chatter and speculation. The worst thing you can do is fall prey to the rumors and buy into the latest investment fads. Most get-rich-quick schemes are guaranteed failures.
Stay the course. Develop an investment strategy and stick to it. The markets will rebalance themselves in time. So, continue to contribute to your portfolio, particularly during a bear market. Positive returns take time, patience, and perseverance.
2. Lower your cost of investment.
Investment expenses add up quickly. Fees are often overlooked since they aren’t clearly listed in an invoice. And, they also look smaller on paper. A fee of 1% or 2% may not seem like much. 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 on your investments but paying 2% in expenses, you’ve reduced your return to 7%. A 2018 Consumer Reports survey noted 46% of investors were unaware of how much they paid in expenses. If you aren’t paying attention to how much you pay in management fees, brokers certainly won’t bring it to your attention.
Therefore, do some homework and review your statements. Then, talk with your broker to identify how much you pay in fees. Look for costs listed as management fees, sales charges, and maintenance fees. If you don’t like what you see, consider moving to an online broker. Online brokers typically charge a flat fee per trade. Alternatively, you could also look into investing in a low-cost mutual fund through Vanguard.
Similarly, taxes are another hidden cost to investments. If you think you are paying too much in taxes, consult with an attorney or CPA. They can ensure your investment strategy includes minimizing your tax exposure.
3. Assess your 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 consider such as real estate, precious metals (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 just starting to invest and tend to be more aggressive, financial advisors will direct you 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 assets such as bonds and annuities.
4. Diversify your portfolio.
Asset allocation is determining which category you invest in. However, diversification is how you spread your investments across and within those categories. 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.” This is the very definition of diversification.
A properly diversified portfolio will lower your overall risk. Some of your assets will continue to perform well when others are experiencing losses. The market constantly fluctuates. But, diversifying your portfolio will insulate you against major losses since your gains will offset them.
Proper diversification can be challenging. Therefore, you may want to consider investing in mutual funds. Many mutual funds are already well diversified by spreading the underlying securities across thousands of companies and multiple assets. In essence, they do all your work for you. On this topic, savedbythecents.com has a great article on this topic.
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.
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. Plan to rebalance your portfolio at least once per year to optimize the returns on your investments.
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, large swings in the market.
Imagine your portfolio is growing steadily for several years. Then, within a few weeks, the market crashes. Sadly, you lose half of your value. Avoid the impulse 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.
Instead, stick to your guns. Rely on your research knowing that you’ve properly diversified your portfolio. When the market stabilizes, 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”.
7. Seek professional advice.
Sometimes, we are simply too close to the situation to see the best course of action. That’s why it’s important that you find a financial advisor you trust. Once they understand your risk tolerance and investment strategy, they can best advise you on how to maximize the returns on your investments.
However, it can be difficult to choose a financial advisor. The good news is that there are now more options than ever before. If you prefer to manage your portfolio yourself, you can use robo-advisors to automate your investments. There are also a variety of online and traditional advisors out there, waiting to assist.
Obviously, you want someone with a solid reputation and whose goals align with yours. No matter which advisory service you go with, thoroughly vet them before committing any money. And when in doubt, you can always ask for a referral from friends, family members, or coworkers.
With the technology and trading platforms now available, literally anyone can start investing. However, strategic planning and expert advice can help you optimize your portfolio’s performance.
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.
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.
The 3 fund portfolio.. Set it and forget about it.. Over time its not going to let you down. And make sure its all Vanguard index funds.. Cheapest in town.
Jenny Smedra says
I like Vanguard as well, they have very low fees. However, I also like to be more hands-on with my portfolio.